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 adversely be affecting their parent companies.
In these circumstances, the interests of a number of "stakeholders" need to be properly protected and balanced—shareholders, of course, employees, customers, creditors, debtors and the local authorities as regulators and tax collectors. The closure of a company may often provoke strong emotions and feelings of uncertainty for many of those involved, too.
There are, of course, regulations under Chinese law for how these processes should properly be carried out, to ensure that the company's final bills are settled, taxes are paid, staff are properly handled and all the company's remaining liabilities and statutory responsibilities are correctly discharged. In this special report we explain the procedures one needs to go through to close a foreign-invested enterprise in China, and highlight the many related issues that needs to be addressed. We hope that you never have to go through the process, at least for negative reasons, but if you do, it must be done professionally and correctly.
The liquidation process
The procedures for closing a wholly foreign-owned enterprise (WFOE)—its dissolution and liquidation—are no easier or shorter than the process of setting up such a company, and normally take between six to nine months to complete.
According to Chinese law, a WFOE must be dissolved if any of the following circumstances apply:
- Its term of operation expires;
- The board of shareholders has adopted a resolution for dissolution to dissolve the company;
- It is merged or divided;
- Its business license is revoked by law, or the company is ordered to terminate or cancel its operations;
- When there are serious difficulties on its operation and its continuance will definitely cause significant losses to shareholders' interests, and such a scenario cannot be solved through other channels, then shareholders representing 10 percent of all the votes may request the people's court to dissolve it; or
- Other reasons for dissolution stipulated in the original articles of association have occurred.
Upon the declaration of dissolution, the company is required to start the liquidation procedures.
Creation of liquidation team
A liquidation team is composed of company shareholders to handle the liquidation within 15 days from the dissolution date of the company. The liquidation team shall liquidate and value the company's assets in accordance with Chinese law and the articles of association. During the course of liquidation, the company shall not conduct any business activities irrelevant to the liquidation. The liquidation team shall have the right to handle the company's ongoing businesses which are related to liquidation, i.e., to terminate employment contracts, to sell, export, transfer, assign or otherwise dispose of any and all assets belonging to the company whether they be inside or outside the People's Republic of China, as well as conclude all business matters of the company in accordance with Chinese law and the principles set out in the articles of association.
The liquidation team shall exercise the following functions and powers during liquidation:
- Liquidate the assets of the company, prepare a balance sheet and list of assets, and formulate the liquidation plan;
- Make an announcement for the benefit of unknown creditors and notify known creditors in writing;
- Complete any unfinished business of the company;
lPay all outstanding taxes;
- Settle all of the company's claims and debts;
-Dispose of the remaining assets after the company's debts have been settled;
- Represent the company in any civil litigation; and
- Produce the liquidation report and submit it to the board of shareholders and the authorities for approval.