With the labor cost rising, local enterprises becoming more competitive and the operation costs spiking due to the dynamic zero-Covid policy in China, some foreign-invested enterprises may consider applying for business suspension or the dormant company status, as stated in Business Suspension System: A Way Out Under COVID-19 in China (I). Some of them may even choose to exit the Chinese market, for which the foreign-invested enterprises can either transfer its shares or go into liquidation. For the latter, there are three approaches, namely, voluntary liquidation, compulsory liquidation, and insolvent liquidation. These three approaches can be converted into each other under certain conditions. From our experience as Chinese lawyers engaged in the foreign field for a long time, voluntary liquidation is the main approach adopted by foreign-invested enterprises. Here below we will introduce some major issues related to liquidation for your reference.
1. Legal Basis of Liquidation of Foreign-invested Enterprises
The Foreign Investment Law of the People’s Republic of China (hereinafter as the “Foreign Investment Law”) and its Implementation Regulations have come into force since January 1, 2020. Yet no detailed provisions about the dissolution and liquidation of foreign-invested enterprises are provided therein. With the repeal of such laws and regulations as the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures, the Law on Wholly Foreign Owned Enterprises and Measures for Liquidation of Foreign-invested Enterprises, in view of the trend of unified treatment for both domestic and foreign investment, we believe that the dissolution and liquidation of foreign-invested enterprises shall be subject to the Company Law of the People’s Republic of China (hereinafter as the “Company Law”) and its related rules and regulations. Some of the major sources of provisions are listed below for your reference.
In addition, guidelines on the procedures of liquidation and de-registration are usually available on the official website of the local registration authority thanks to the improvement of the business environment and the wide application of e-government services.
2. Procedures of Voluntary Liquidation of Foreign-invested Enterprises
According to the Company Law and relevant administrative rules and judicial interpretations, the procedures of voluntary liquidation of foreign-invested enterprises include the following steps:
1) occurrence of the cause of dissolution;
2) formation of the liquidation group within 15 days upon the occurrence of the cause of dissolution and commencing liquidation;
3) upon the formation of the liquidation group, it shall
- make a public announcement about the members of the liquidation group and the person in charge of the liquidation group in the National Enterprise Credit Information Publicity System
- notify the creditors within 10 days, and make a public announcement on newspapers or in the National Enterprise Credit Information Publicity System within 60 days, with the publicity period being 45 days
4) creditors declare its claims with the liquidation group within 30 days after they receive the notice or within 45 days after the date of announcement if they fail to receive the notice;
5) the liquidation group sorts out the claims against and debts of the enterprise, make a liquidation plan and report such plan to the shareholders’ meeting or its equivalent for confirmation;
6) the liquidation group carries out the liquidation plan;
7) the liquidation group handles other tax, customs, foreign exchange settlement procedures;
8) the liquidation group makes a report on the liquidation after completion of such liquidation plan;
9) the shareholders’ meeting or its equivalent confirms the liquidation report and the liquidation procedures are completed;
10) after the liquidation is completed, the de-registration application shall be filed with the original registration authority within 30 days; the branches of the enterprise shall be de-registered according to the law prior to the de-registration of the enterprise.
It is noteworthy that simplified de-registration procedures can be adoptable where the enterprise has not incurred any claims or debts or has already settled the claims and debts, and has not incurred or has paid off repayment expenses, employee salaries, social insurance fees, statutory compensations, and payable taxes (late fees, fines), on the condition that all the shareholders undertake in writing to bear legal responsibility for the authenticity of the above-mentioned circumstances.
The enterprise shall publicize the letter of undertaking and the application for de-registration through the National Enterprise Credit Information Publicity System, with the publicity period being 20 days. If there is no objection from relevant departments, creditors and other interested parties during the publicity period, the enterprise may apply to the registration authority for de-registration within 20 days from the expiration of the publicity period.
If you have any queries about liquidation of foreign-invested enterprises or intend to engage a Chinese lawyer to assist you with exiting the Chinese market, please contact us via firstname.lastname@example.org.