Foreign investors may decide to close their China operations for various reasons. Closing operations in China involves dissolving and liquidating the company.
Abandoning a company without completing the legal requirements can result in severe penalties for personnel and the company. Specifically, the personnel and company can be blacklisted, and individuals may not re-enter China or face visa difficulties. We strongly recommend a proper and thorough liquidation to reduce risks. Below, we provide a Q&A for foreign investors to understand their liabilities and penalties when closing operations in China.
Q. What is the legal basis for closing a company in China?
A. The Company Law of the People’s Republic of China (“Company Law”) refers to dissolution and liquidation for winding up company procedures. Dissolution is the legal act of any established company in China ceasing corporate operating activities under any conditions provisioned in the Articles of the Association (“AoA”) or a legally permitted circumstance.
Liquidation is a compulsory procedure for corporate termination and protects the interest of the shareholders and creditors. Dissolution and liquidation procedures can be conducted simultaneously. It involves settling creditors’ rights and debts, distributing the remaining properties to shareholders, and handling the formalities of corporate deregistration and business license revocation. When liquidating a company, investors should review the company, determine a plan, and ensure ample time is designated. The termination process can be lengthy and costly, especially if it involves terminating employees and settling debts with third parties. Investors should comprehend all aspects of the company; overlooking aspects can result in legal liabilities for the company and individuals.
Q. Can investors terminate a company under any circumstances?
A. In the Company Law, the company can be dissolved under the following conditions:
- Term of business operation as prescribed in the Articles of Association (“AoA”) expires or dissolution event as prescribed in the AoA;
- The board of shareholders or the general meeting resolves to dissolve the company;
- Dissolution of the company is necessary due to any combination or division to which the company is a party;
- The business license is revoked, or it is ordered to close down or be dissolved in accordance with the law;
- The company encounters serious difficulties in its operations or management, causing significant shareholder losses if they persist and the situation cannot be resolved by any other means, shareholders representing 10% more of the shareholders’ voting rights may petition the People’s Court to dissolve the company.
In practice, where the investors close the company, the resolution of the shareholders to dissolve the company is required to initiate the legal procedures. Where the shareholders do not unanimously agree to dissolve the company, the Company Law permits shareholders representing 10% or more of the voting rights to petition the people’s court to dissolve the company. However, such circumstances should satisfy the above conditions.
Q. Can the business still operate during the termination process?
A. During this period, the legal status of the company still exists. Though, the company exists for liquidation. So the company cannot operate other than the activities related to liquidation. If the company continues operations, the registration authority shall reprimand the company and confiscate any profits generated.
Q. What is the liquidation committee?
A. Under the Company Law, the liquidation committee must be formed within 15 days from the shareholders’ resolution to dissolve the company. The liquidation committee is permitted to perform the following functions and powers:
- Liquidate the company’s assets and produce a balance sheet and schedule of assets;
- Notify the company’s creditors with a notice or public announcement;
- Manage and clear the remaining business of the company;
- Pay outstanding taxes and any tax liability incurred in the course of the liquidation;
- Pay the company’s accounts payable and recover its accounts receivable;
- Dispose of the company’s residual assets; and
- Represent the company in any civil litigation to which it is a party.
Members of the liquidation group owe an obligation to conduct the liquidation procedure in accordance with the Law. In other words, the members shall not take advantage of their position and receive unlawful payments from such duties. Violations can face monetary penalties, which are calculated based on the illegal earnings received.
We recommend that the liquidation committee formulates a clear schedule of the liquidation procedure – especially in matters related to employment, contractual obligations, and outstanding balances and payable taxes. In this manner, each liquidation step is clearly outlined to reduce risks.
Q. When can shareholders receive the remaining assets of the company?
A. The company shall only distribute company assets to the shareholders once completing the following payments:
- Liquidation expenses
- Employee salaries, including social insurance premiums and statutory indemnity premiums
- Outstanding payable taxes and taxes incurred during liquidations
- Outstanding debts
Company assets must be distributed to the shareholder according to the proportion of capital contributed by each shareholder. Where the liquidated company assets are insufficient to pay the obligations, the company may file for bankruptcy with the People’s Court. Once a company is declared bankrupt by the People’s Court, the liquidation committee shall hand over the administration to the People’s Court.
Conclusion
The duration of dissolving and liquidating a company depend on various factors such as employee terminations, pending legal lawsuits, outstanding debts, and the location.
Companies shall settle all matters before de-registration and inactivating the legal status. Shell companies (non-operating businesses) are forbidden; authorities can track shell companies by absent business transactions such as issuing fapiaos (invoices), bank account activity, and employed personnel.
Companies shall settle all matters before de-registration and inactivating the legal status. Shell companies (non-operating businesses) are forbidden; authorities can track shell companies by absent business transactions such as issuing fapiaos (invoices), bank account activity, and employed personnel.
If the liquidation is incomplete, foreign investors and legal representatives can be permanently prohibited from entering and working in China
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