By: Alex Wu, Donia Joevion Fuller-Barrett
Reference to the company “chop” and its importance was made in the first article of this 5 part series. However, because there is such a significant difference between China’s Company Law and those of the Western world, where most foreign companies originate, it was felt that the fifth article in the series ought to spend some time explaining the implications of the company chop.
In the Western world, the signature of the legal representative, general manager or another authorized signatory as dictated by the articles of association or articles of incorporation as they are called in other jurisdictions, is what binds a company. This signature alone can suffice even in the absence of the company seal in some instances furthermore the absence of the company seal is not necessarily detrimental to the validity of a contract. However in China, the Company Chop is even more crucial than a signature. Every validly registered company in China is required to have a Company Chop, which must be registered with the Public Security Bureau (PSB). There are instances where the use of the chop even without the presence of the legal representative or someone authorized to use it has bound a company to obligations it would rather not fulfill. An even bigger challenge is where the company is bound to do something which could cause it to lose its authority compliant status. Evidently then, a key feature of risk management and the regulation of a company’s state of authority compliance involves systems which manage the use of the Company Chop.
Company chop: Arguably the most important, because of what it signifies, this mandatory chop must be approved by the Public Security Bureau (PSB) and every company which is registered with Administration of Industry and Commerce (AIC) must cause one to be produced as soon as registration is completed. The Company Chop is used to ensure the legal execution of all documents in relation to the company. Therefore any activity being undertaken to for instance, modify some aspect of the company’s identity will require the Chop and even more mundane things in the execution of the company’s daily activities, like the opening of a bank account will require the use of the Chop in order to have legal validity.
Contract Chop: As the name suggests, the use of this Chop is limited to execution of contracts, especially those related to trading purposes.
Financial chop & Invoice/fapiao Chop: The financial Chop has limited use in relation to financial transactions, such as the issuance of a check; it has a similar function as the invoice/fapiao Chop is which is used for the issuing of an invoice/fapiao. In China, invoice/fapiao without a seal is not valid and therefore cannot be accepted. The Invoice/fapiao Chop’s function can be replaced by a Financial Chop therefore there is no need to have both.
Legal representative’s name Chop: This chop is a personal chop of a company’s legal representative and is not mandatory, but is useful as it allows the legal representative to execute legal documents or authorize other legal transactions even if he/she is not physically present. Like the company chop it must be recorded with the Public Security Bureau, the Administration of Industry and Commerce (AIC), and with the local bank.
Human Resource Chop: Again, this is another special purpose Chop which is commonly seen on employment contracts between the company and its employees. Some government bodies require the use of this Chop for the purposes of employee registration.
In view of what has been stated at the outset regarding the potency of Company Chops, it is patently clear that inappropriate and otherwise unauthorized utilization of Chops may result in legal issues for a company. Like any other situation which may pose a risk to a company, it is imperative that a Chop management system is implemented so as to prevent detrimental use of same.
Usually, the legal representative is responsible for the Company’s chop management, because of the tremendous liability, civil and otherwise which he/she may have to bear in the event of its misuse. Nonetheless, in some companies such functions are sometimes delegated to the general manager or executive director in so far as they must be aware of and indeed coordinate the delivery, collection and use of the Chop.
Without an effective chop checking or chop management system, a company will expose itself to the risk of the chop getting lost, stolen, used without proper or any authorization or instances of inadvertent or reckless misuse. Asia Base Law & Projects – with their Corporate Compliance Guard provides an extra security in the sense that the “chop policy” is one of the audited documents in the system. If a chop policy is absent, the experts at Asia Base Law & Projects are recognized as having the skill required to establish one that is suitable to your company’s specific needs. Noteworthy is that in any of the aforementioned situations a company could be deemed to have engaged in illegal activities, could face financial losses or become embroiled in internal and external disputes even without the knowledge of the key company officials.
The following areas may be looked at and adopted as part of internal procedures comprising a Chop management system-
1. Application Procedure for use of Chop
Regardless of which authorized personnel who is desirous of using the Chop, he/she must adhere to the procedures established which will facilitate the recording of the date, user’s name, reason for use and signature of that person. Authorization must be communicated in writing by the general manager and solely for the purpose in relation to which the application was made.
2. Custody of Chop
No one should be permitted to have custody of several Chops, especially if the two have related functions for example a company chop and contract chop. All Chops should kept by the persons specified by the legal representative, general manager or chief executive officer and never passed to others without authorization. This is one of the reasons why it is advisable that where possible, the legal representative and the general manager should be distinct persons. Furthermore, the Chops should not be used outside of the office or outside of regular office hours unless specified in the application procedure and should not be kept on the person of the authorized personnel. Loss, theft or damage must be reported immediately. In the alternative, you may opt to hire a third party custodian of the chops which would limit opportunities for misuse altogether.
3. Delegation management
As a rule, any department or individual which requires the use of the Chop must adhere to the application procedure but also show that the use is based on operational and efficiency purposes.
4. Handing Over Upon Termination/Resignation
Anyone who usually has possession of a Chop must be contractually mandated to hand over same immediately upon termination and/or resignation. Having sealed, undated letters of resignation/termination would be useful in these instances as discussed in part 1 of this five part article series.
Additionally, the company should detail specific circumstances where both the chop and authorized signature vest a document with validity and could implement a contractual system which includes clauses which stipulate that the other party warrants that it has performed due-diligence to ascertain that the Chop can authorize the type of transaction for which it is being used and that it indemnifies the company against losses arising from a failure to perform any or adequate due diligence.
Reversing the consequences of the unauthorized use of a Chop can be extremely difficult, in some cases is unlikely and in all cases will require the intervention of the Court. The best course of action involves taking preventative action, as opposed to trying to rectify a situation gone wrong