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Special> China International Fair For Investment & Trade> Beijing Review Exclusive> Legal-Ease
UPDATED: May 9, 2009 NO. 19 MAY 14, 2009
Liquidating a Chinese Business II

With the global economic crisis hitting some businesses in China very hard as export sales dry up, now is a timely occasion to remind executives of affected businesses of their responsibilities when having to liquidate a business. China-based subsidiaries may also be impacted by external circumstances beyond their control that may be adversely affecting their parent companies.

Liquidation audits

Liquidation audits are generally required twice in the process:

—When the termination application is submitted to the authorities and the application is approved by those authorities; and

—When all termination procedures have been completed.

As well as normal audit procedures, liquidation audits focus on these additional issues:

—The financial performance of the company for the six months before the date of declaring liquidation;

—The completeness and truth of information on assets, such as:

- Whether the calculation of accounts receivable is correct;

- Whether the bad debts write-off was properly authorized;

- Whether the bank account records are complete;

- Whether physical assets properly belong to the company;

- Whether disposal/loss of fixed assets is approved by related authorities; and

- Whether investing assets are recorded and distributed correctly.

—The liabilities of the company, such as:

- Whether salaries payable are calculated correctly;

- Whether tax payable has been cleared properly; and

- Whether other liabilities have been cleared properly.

—The liquidation expenses, including a check on whether these expenses were spent in compliance with the law.

Liquidation deadlines

The liquidation team shall observe the following deadlines:

—Within seven days of beginning the liquidation, the relevant authorities must be notified;

—Within 15 days of beginning the liquidation, the liquidation team must be established;

—Within 10 days of establishing the liquidation team, it must notify known creditors and ask them to declare their claims;

—Within 60 days of establishing the liquidation team, it shall make at least one public announcement in a national or provincial newspaper; and

—Within 30 days of submitting the liquidation report, liquidation team should perform the deregistration procedures with original registration authority.

Distribution of liquidated proceeds

In accordance with Chinese law, revenues from the sale or disposal of the liquidated assets shall be paid out in the following order:

—Liquidation expenses, including expen-ses for management, sales and distribution; expenses for public announcements, lawsuit and arbitration; remuneration to members of and advisors to the liquidation team; and other expenses occurred during the liquidation;

—Wages and mandatory welfare pay-ments for employees;

—Outstanding taxes;

—Outstanding secured debts; and

—Other outstanding debts.

After payments have been made in accordance with provisions above and upon completion of the liquidation procedures, the remaining revenue shall be converted into U.S. dollars, or any other foreign currency acceptable to the investor through a designated foreign exchange bank or any other method permitted by Chinese law, and can be freely remitted or transported abroad.

Cancellation of registration

Once the liquidation procedures are completed, the liquidation team needs to submit a liquidation report, approved by the board of shareholders, to the original approval authority. The team should return its business license and cancel its registration with the relevant government authorities including the Ministry of Commerce (MOFCOM), the State Administration for Industry and Commerce (SAIC), the customs administration, the tax authorities and the State Administration of Foreign Exchange (SAFE). All the company’s bank accounts shall be closed.

The investor shall have the right to preserve the originals of all accounting records and business documents of the company.

Within 30 days from submission of the liquidation report, the company should perform deregistration with the authorities, and after deregistration, the company can repatriate the remaining funds back to the investor. These deregistration procedures and other processes include:

—Deregistration from the MOFCOM, and cancellation of the approval certificate;

—Tax audit and deregistration from local tax bureau;

—Tax audit and deregistration from state tax bureau;

—Customs deregistration;

—Deregistration from the SAFE;

—Deregistration from the SAIC;

—Deregistration of Business Code Certificate;

—Public announcement in a newspaper to terminate the business;

—Remit funds back to investors; and

—Close bank accounts.

In addition, some companies in particular sectors may have other specialized registrations and those should be closed off as well. Although not strictly a financial issue, foreign investors should also ensure that, for example, unused raw materials and unsold products are disposed of properly in an environmentally sensitive way, and that buildings and other major assets are dealt with properly.

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