We have already introduced the general procedures of liquidation for foreign-invested enterprises in “Exit Chinese Market: Guideline on Liquidation for Foreign-invested Enterprises” from the perspective of Chinese lawyers with rich experience in the foreign business field. In this article we will further analyze some common issues related to the liquidation group.
1. Members of Liquidation Group
As currently most of the foreign-invested enterprises in China are limited liability companies, we will mainly focus on the members of the liquidation group of limited liability companies in this article. According to Article 183 of the Company Law of the People’s Republic of China, the liquidation group of a limited liability company shall be composed of the shareholders. In practice, it is not necessary for the shareholders of a foreign-invested enterprise in the form of limited liability company to participate in the liquidation procedures of the enterprise by themselves. The liquidation group may be composed of personnel appointed by the shareholders’ meeting in writing, or the directors, legal representative of the enterprise, certified public accountants, lawyers, or any other person who is qualified to perform such duty. Therefore, the members of the liquidation group may vary from case to case.
2. Functions of Liquidation Group
The liquidation group may exercise the following functions during the process of liquidation:
(1) liquidating the properties of the company, producing balance sheets and lists of properties;
(2) notifying creditors by mail or public announcement;
(3) handling and liquidating the unfinished business of the company;
(4) paying off the outstanding taxes and the taxes incurred in the process of liquidation;
(5) claiming credits and paying off debts;
(6) disposing of the remaining properties after all the debts are paid off; and
(7) participating in the civil proceedings on behalf of the company.
In order to prepare a liquidation plan, the liquidation group needs to conduct comprehensive due diligence on the company. The key to such due diligence is to discover all legal relationships that need to be terminated, to identify obstacles and hidden dangers to the termination of such legal relationships, and to identify obstacles to the advancement of the liquidation process. The due diligence for liquidation usually involves investigating the current situation of the company to be liquidated, historical development, organizational structure, authority, senior management, business model, joint venture contract, articles of association, labor relations, creditor’s rights and debts, assets, unfulfilled contracts, employees, pending legal disputes, administrative penalties, etc. Investigation priority will be given to different matters for enterprises in different industries. A comprehensive liquidation due diligence report helps to formulate a more targeted liquidation plan, and prompts shareholders and the liquidation group to hold reasonable expectations for the time needed for liquidation.
3. Meetings of Liquidation Group
The meetings of the liquidation group are meant to communicate the progress of liquidation and advance the liquidation process. To ensure the legal effect of the liquidation plan, mitigate the risk of disputes and ensure the compliance of the liquidation procedures, we would suggest that the meeting minutes should be submitted to the shareholders’ meeting or other equivalent authority after each meeting for confirmation by signing or stamping on such minutes. In case of objection raised by some members of the authority, such as shareholders in the shareholders’ meeting, such objection should be dealt with promptly.
4. Responsibilities of Liquidation Group
The liquidation plan prepared by the liquidation group after liquidating the properties of the company shall be confirmed and approved by the authority of the company such as the shareholders’ meeting. Without confirmation, the liquidation group shall not carry out such liquidation plan. After the liquidation of the company is completed, the liquidation group shall make a liquidation report and submit the report to such authority for confirmation and the company registration authority to deregister the company. The liquidation group shall also make a public announcement about the termination of the company. Where the company or creditors suffer losses due to the implementation of unconfirmed liquidation plan, the company, shareholders, directors, other stakeholders or creditors may claim that the members of the liquidation group should be liable for compensation.
The members of the liquidation group have the duty of loyalty and diligence to the company and its creditors. They shall devote themselves to their duties and perform their obligations of liquidation according to law. Where any of the members of the liquidation group causes any loss to the company or any creditors by intentional conduct or gross negligence, he shall be liable for compensation. Where the liquidation group fails to perform its obligation of making notices and public announcements on time, resulting in the failure of the creditors to declare their claims in time and their not being paid off, the creditors may claim that the members of the liquidation group should be liable for the losses caused thereby.
We have to draw your attention to the following point. The liquidation group must attach great importance to keeping the account books. If the account books are lost, not only will the company not be able to complete the deregistration, but the creditors of the company in liquidation may also require the members of the liquidation group to bear the liability for compensation on the grounds that the members of the liquidation group have caused losses to the company or the creditors by intentional conduct or gross negligence.
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