By Stephen Lou

Introduction

In the wake of the economic crisis, there have been stories of foreigners in Dubai abandoning anything from their automobiles, newly purchased real estate, and other belongings while leaving the country for fear of facing criminal liability due to unpaid debts. China too has seen similar trends regarding foreign investors abandoning their manufacturing plants, liquidating existing bank accounts and leaving unpaid debts to creditors and employees. China’s relevant ministries have responded with the issuance of the Working Guidelines on Cross-border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with Abnormal Withdrawal from China of Foreign Investors, to assist Chinese parties to initiate legal action against such foreign investors.

The Guidelines can also affect foreign investors, who have not necessarily “abnormally withdrawn”, but who have not gone through the proper closure/de-registration procedures of a company. As such many foreigners who had initially opened representative offices (RO) or wholly foreign-owned enterprises (WFOE) but have since “changed” or “upgraded” to a WFOE or joint-venture (JV) status have failed to de-register the first entity. The foreign investor may mistakenly believe that in fact the entity status has been changed or upgraded, when in fact this is not the case.

Criminal and Civil Liability

In terms of incurring liability, the Chinese court may find that the corporate veil may be pierced and subject the legal representative to personal liability. Where it is found that employees have not been paid their wages or other debts are outstanding the foreign principals may have their China visa revoked. It has not been unheard of where more serious measures have resulted in the foreigner being prohibited from leaving the country or worse, being detained.

Along with the existing Company law provisions providing that shareholders as well as legal representatives to be held personally liable, the Guidelines further provides the possibility that a creditor may be entitled to other assets (other businesses) of the foreign investor in China. Although measures can be taken to limit the liability of the foreign investor to that specific entity, it is still wise not to open such potential for liability due to failing to properly close a non-operating entity. Failing to properly terminate and de-register will result in the entity to be black-listed in China, and even incurring criminal liability on certain individuals who have failed to pay the relevant taxes.

Termination Procedures

Below is a non-exhaustive overview of the procedure for termination and de-registration of a foreign-invested enterprise in China:

A foreign-invested enterprise (FIE) may be liquidated in the following situations:

1. Expiration of joint venture contract terms;
2. consent of investors to dissolve the enterprise due to poor operation and serious losses;
3. failure of either party to fulfill its obligations defined by the contract;
4. enterprise cannot continue to operate due to serious losses due to force majeure or government intervention
5. enterprise has become insolvent;
6. enterprise has been dissolved for violation of law or harming public interests;
7. other reasons as defined by the contract and articles of incorporation.

Procedures for Termination of FIE

If any of the above situation occurs:

1. Submit application for termination to relevant authorities;
2. public announcement and notification of creditors of intentions to liquidate assets (15 days);
3. produce the procedure and principles for the liquidation of assets and nominate candidates for the liquidation panel (responsible of the entire liquidation process);
4. panel to determine the assets, creditor’s rights and debts of the enterprise, provide a statement of assets and liabilities and catalogue of properties, propose the basis for assets evaluation and computation, and set forth the liquidation plan;
5. once all debts are paid, the remaining assets (if any) shall be shared among the original investors based on the relevant provisions of the contract and articles of incorporation;
6. provide liquidation report to the board of directors for adoption;
7. submit liquidation report to the reviewing and approving authorities for approval;
8. de-registration and return the business license of the enterprise for revocation.

Procedures for the de-registration application

1. Apply for tax de-registration;
2. submit the liquidation report issued by a Chinese chartered auditing firm;
3. submit the auditing report and the related documents to the tax bureau officer for approval;
4. submit certified approval to the Tax Bureau in the relevant district;
5. obtain approval from the tax bureau, and resulting certificate issued by the tax bureau officer certifying the completion of the tax payment;
6. if the company is engaged in import and export, additional documents are required certifying the completion of tax payment from customs;
7. apply and obtain de-registration of Foreign Exchange Registration approval Certificate;
8. de-registration of all bank accounts, including all foreign currency and RMB accounts;
9. obtain De-registration of Registration Certificate;
10. obtain De-registration of Enterprise Code Certificate ;
11. obtain De-registration of Statistics Certificate.

Stephen Lou is foreign legal counsel with Gaopeng & Partners’ International Practice Group in Beijing. His practice involves international corporate and commercial transactions, including FDI, franchising, mergers and acquisitions and general corporate matters. Stephen is admitted to the California Bar. You can contact Stephen at Stephenlou@gaopenglaw.com or learn more about the firm at www.gaopenglaw.com

Be Sociable, Share!

• 
•