As Chinese lawyers specialized in the foreign business field, we are going to analyze shift in liquidation process and the relevant liabilities for exiting the Chinese market without liquidating the foreign-invested enterprises in China in this article. If you want to know more about liquidation of foreign-invested enterprises, please refer to the “Exit Chinese Market: Guideline on Liquidation for Foreign-invested Enterprises”, the “Exit Chinese Market: Analysis of the Common Issues Concerning Voluntary Liquidation of Foreign-invested Enterprises (I)”, the “Exit Chinese Market: Analysis of the Common Issues Concerning Voluntary Liquidation of Foreign-invested Enterprises (II)”, the “Exit Chinese Market: Analysis of the Common Issues Concerning Voluntary Liquidation of Foreign-invested Enterprises (III)”.

  1. Shift from Voluntary Liquidation to Insolvent Liquidation or Compulsory Liquidation

(1) Shift to Insolvent Liquidation

Article 187 of the Company Law of the People’s Republic of China provides that if the liquidation group finds that the properties of the company are not sufficient for paying off the debts after liquidating the properties of the company and producing balance sheets and checklists of properties, it shall file an application to the people’s court for bankruptcy. Once the people’s court makes a ruling declaring the company bankrupt, the liquidation group shall hand over the liquidation matters to the people’s court.

During voluntary liquidation, if the foreign-invested enterprise finds itself insolvent, it shall shift to the process of insolvent liquidation in accordance with the Enterprise Bankruptcy Law of the People’s Republic of China. Where the enterprise in liquidation is insolvent, it is quite likely that the creditors won’t be able to get all their money back. It is time for the court to intervene so as to protect the rights and interests of the creditors through due process of law. The liquidation led by the court can also protect the members of the liquidation group from claims for compensation by the interested parties.

(2) Shift to Compulsory Liquidation

In practice, when the Chinese and foreign shareholders of a foreign-invested enterprise disagree on issues such as layoff and compensation of employees, bearing of debts and fees, disposing of assets, distribution of properties, division of businesses during liquidation, they may reach a deadlock. In this situation, the shareholders or directors may, as per Article 7 of the Provisions (II) of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China, apply to the people’s court for compulsory liquidation, where the liquidation group shall be designated by the court.

  1. Liabilities of Exiting without Liquidation

Liquidation is a process required for the foreign-invested companies to exit the Chinese market. Without liquidation according to law, if losses are incurred thereby to the creditors, the shareholders, directors and other major persons in charge shall bear the relevant legal liabilities.

The importance of lawful liquidation prior to pullout of foreign investment is emphasized in the Working Guidelines for the Chinese Interested Parties Related to the Abnormal Pullout of Foreign Investment to Conduct Transnational Investigation and Litigation.

This Guidelines clarifies that the shareholders of the foreign-invested enterprise shall bear joint and several liability for paying off the debts of the foreign-invested enterprise if such enterprise pulls out without lawful liquidation.

It also stipulates that when a Chinese party wins its case in a civil procedure, if the losing party, which is a foreign party, has no enforceable property within the territory of the PRC, the winning party may apply to the competent court in the foreign country for recognition and enforcement of the effective judgment issued by the Chinese court, in light of the relevant provisions of Treaty on Judicial Assistance in Civil and Commercial Matters entered into by China and such foreign country or the laws in the jurisdiction where the losing party’s property is located.

According to the Guidelines, for a small number of criminal suspects who maliciously evade the payment of arrears, including a large amount of taxes, and are suspected of committing crimes, the relevant competent state departments may, after filing the case, submit extradition requests or criminal proceeding transfer requests to the country to which the criminal suspects fled through its central authorities or diplomatic channels specified in the treaty, as the case may be, so as to ensure that criminal suspects are brought to justice as much as practical.

In short, foreign-invested enterprises that pull out without liquidation and maliciously evade the payment of a huge amount of tax arrears will be subject to civil liabilities for compensation and even criminal liabilities.

Liquidation is a complex project. This is especially true for enterprises that has operated for a long time. They usually have more issues to resolve, such as tax, employees, assets, claims and debts, unfulfilled contracts, etc. Besides, many legal entities are involved in the liquidation process, including the liquidation group, the enterprise in liquidation, employees, government authorities, debtors, creditors, affiliated enterprises and shareholders, among which they maintain complex and complicated legal relationships.

In a sense, liquidation is meant to, through due process, dissolve and terminate such relationships between the enterprise in liquidation and these entities, and also complete financial settlement. So foreign-invested enterprises should be prepared with adequate personnel and funds to accomplish a lawful pullout based on compliant liquidation.

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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