Following our analysis of the dissolution resolution and tax matters in “Exit Chinese Market: Analysis of the Common Issues Concerning Voluntary Liquidation of Foreign-invested Enterprises (I)”, we are going to discuss the ways to deal with the unfulfilled contracts, intellectual property rights and employees from the viewpoints of Chinese lawyers engaged in the foreign business field for a long time.

1. Unfulfilled Contracts

It is highly probable that the enterprise to be liquidated has receivables that are hard to receive within a short term and some contracts that cannot be fully fulfilled. In order to expedite the liquidation process, the common practice is to transfer the claims and debts of such enterprise on the receivables and under the unfulfilled contracts as a whole to its affiliated enterprises or the Chinese shareholders. For some major contracts with a relatively long term of performance, there are usually provisions stipulating the ways to deal with the contracts when the enterprise is in liquidation. As far as we are concerned, it is advisable for the enterprise to be liquidated to take early action to sort out the performance situation of its contracts, and make clear the rights and obligations that are to be exercised or fulfilled so that the enterprise can respond thereto in a timely manner according to the provisions of these contracts, such as by means of notifying the other party promptly as agreed in the contracts and negotiating a solution.

2. Intellectual Property Rights

Where the enterprise to be liquidated has patents, trademarks, software copyrights, trade secrets and other intellectual property right or licensed technologies, it shall deal with the same correspondingly in accordance with their respective nature. If the enterprise plans to transfer the patents and other intellectual property rights it holds to a foreign entity, relevant registration procedures shall be handled in accordance with the provisions of laws and administrative regulations.

3. Employees

According to Article 44 of the Labor Contract Law, where the employer decides to dissolve the company ahead of schedule, the labor contracts may be terminated. In case of termination of the labor contracts due to early dissolution of the company, the employer shall compensate the employees therefor in accordance with Article 47 of the Labor Contract Law, that is, the employer shall pay the employee one monthly salary for each year the employee worked; where the working period of the employee is over 6 months but less than a year, such period shall be counted as a year; where the working period of the employee is less than 6 months, the employer shall pay the employee half of his monthly salary as economic compensation; if the monthly salary of the employee is higher than three times the average monthly salary of employees in this area declared by the people’s government at the level of municipality directly under the central government or at the level of a districted city where the employer is located, the rate for the economic compensation shall be three times the average monthly salary of the employees and shall be paid for no more than 12 years. If a company has made a resolution on the dissolution of the company, the company may terminate the labor contracts with its employees as per the Labor Contract Law.

However, there can be great obstacles to the liquidation as well since dismissing the employees is a sensitive issue and sometimes may even trigger group conflicts. Evidently, the compensation for employees should be the primary consideration before starting the liquidation. In such case, we would recommend the foreign-invested enterprise to be liquidated to fully communicate with the local labor department and the labor union in advance and prepare the employee compensation plan at the same time for the successful liquidation and dissolution of the enterprise.

If you have any queries about liquidation of foreign-invested enterprises or intend to engage a Chinese lawyer to assist you with exiting Chinese market, please contact us via administrator@legalandwise.com.

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