Foreign investor seeking to exit from its foreign invested enterprises (including joint venture companies and wholly foreign owned companies) (“FIE”) in China may consider transferring all its shares in the FIE to others, requesting the FIE to return capital by reducing the FIE’s registered capital or voluntary dissolution of the FIE. This article will focus on the introduction of voluntary dissolution under the current Chinese legal mechanism.
The dissolution of a FIE used to be a time-consuming and complicated procedure according to the previous laws and practice. However, in the wake of promulgation of several policies and regulations, the dissolution procedure has been simplified as the required time and costs are significantly reduced. In the recent FIE dissolutions that we have helped with, it took approximately 3 to 5 months to complete the entire process.
The entire process of voluntary dissolution is generally comprised of three major procedures, namely dissolution, liquidation and deregistration as follows:
- Dissolution
- Resolutions on Dissolution and Liquidation Committee Formation
The dissolution shall commence upon its highest authority (normally the shareholders’ meeting or the sole investor) adopting a resolution on the voluntary dissolution. Pursuant to the Company Law, the resolution regarding dissolution shall be approved by shareholders representing at least two-thirds of the voting rights. That been said, we understand according to the articles of association of most FIEs, dissolution must be approved by all shareholders unanimously.
The resolution regarding the dissolution shall state (i) the cause of the dissolution (for example, expiration of operation term, serious loss or revoking of business license by government); and (ii) the formation of a liquidation committee, as well as the appointment of members and principal of the liquidation committee.
The laws do not provide for any requirement on the members and principal of the liquidation committee. Normally, the committee is comprised of 2 to 3 members including 1 principal; the principal can be the chairman of board or the general manager, while other members may include directors and finance head of the FIE. The shareholders of the FIE may also designate external legal counsel or accountants to be the members of the liquidation committee. If the FIE is a joint venture company, each shareholder would better appoint its own representative to the liquidation committee.
2. Announcement of Formation of Liquidation Committee
The FIE should then announce to the public the formation of the liquidation committee and the information about the members of the liquidation committee through the national enterprise credit information publicity system within 10 days of the liquidation committee’s establishment.
2. Liquidation
In accordance with the Company Law, the day on which the liquidation committee is formed is the commencement date of the liquidation. The liquidation committee should carry out the following liquidation activities since then:
- Notification to Creditors
The liquidation committee should notify creditors within 10 days of its formation. In addition, the liquidation committee should additionally make a public announcement via the national enterprise credit information publicity system within 60 days of its formation. The purpose of both the direct notification and the public announcement is to request the FIE’s creditors to register their rights with the FIE for settlement.
- Inventorying of Assets (including Existing Contracts)
The liquidation committee should run an inventory of all remaining assets and existing contracts, and then prepare balance sheets and property inventories. The liquidation committee may engage an appraiser to appraise the assets to build up value basis for disposal of the assets later.
In order to save costs and time spent on the liquidation procedure, it is advisable for FIE to start to dispose assets and terminate the business contracts even before the FIE enters into the dissolution and liquidation procedures
- Termination of Employment of Employees
The FIE shall notify its employees of the decision and shall discuss with them in respect of the termination date and the severance payment on a timely and transparent basis.
To facilitate implementation of liquidation, the FIE may want to maintain one or two staffs who are familiar with the financial situations of the FIE until the completion of the liquidation procedure, because he/they will be required to assist the liquidation committee to handle the liquidation works, especially balance sheet preparation, assets disposal and tax clearance.
- Preparation of Liquidation Plan
After the liquidation committee clearly understand the status of the FIE’s assets and creditor’s rights and indebtedness (including the ones arising from employment and business contracts), the liquidation committee shall prepare a liquidation plan setting forth, among other things, liquidation expenses and costs, taxes to be paid, list of creditor’s rights and indebtedness, list of assets, disposal plan for assets and indebtedness, plan of termination of employment.
The liquidation plan is not required to be filed with the governmental authority but shall be approved by the FIE’s shareholders.
- Implementation of Liquidation Plan
Once the liquidation plan is approved by the shareholders, the liquidation committee shall carry out the liquidation as per the plan.
The account balance and the proceeds from the disposal of the assets must be used to settle outstanding costs and debts in the following order:
- liquidation expenses;
- employees’ salaries, social insurance fees and severance fees;
- outstanding taxes; and
- other indebtedness.
Please be advised that tax clearance is usually the most complicated and time-consuming step in the entire liquidation procedure. As soon as the liquidation starts, the liquidation committee shall apply for a pre-review of the outstanding liabilities to the tax bureau. The tax bureau would issue a “One-Time Notice of Tax Matters” setting forth all the outstanding tax liabilities owed by the FIE. The liquidation committee should settle these liabilities one by one according to the notice. In the course of this process, the FIE shall be prepared to answer questions in relation to the balance sheet and/or make up taxes in arrears as per tax bureau’s requests.
- Liquidation Audit
Since the foreign exchange administration will require the liquidated FIE to provide a liquidation audit report when it distributes remaining fund to foreign shareholders, the liquidation committee shall engage a qualified auditor to conduct an audit and issue an audit report.
- Liquidation Report
After the tasks above have been completed, the liquidation committee shall prepare a liquidation report setting forth, among the other things, the situation and the result of the actual implementation of the liquidation plan. The liquidation report needs to be approved by the shareholders and submitted to the registration authorities for recordation.
3. Deregistration
After the liquidation, the FIE shall carry out the following deregistration with various relevant governmental authorities:
- deregistration with corporate registration authority;
- social insurance deregistration;
- housing fund deregistration;
- deregistration of enterprises for foreign exchange receipts and payments for trade of goods; and
- deregistration with customs.
These de-registration processes are often relatively simple and straightforward. The liquidation committee can normally complete the processes by only submitting a few application forms to the relevant authorities or filling out forms online.
In addition, after the completion of the deregistration with the corporate registration authority as mentioned above, the FIE will need to handle the following matters simultaneously at its bank in order to distribute the remaining fund to the FIE’s foreign shareholders:
- cancellation of foreign exchange registration with the foreign exchange administration;
- provision of the “Notice of Company Deregistration” issued by the corporate registration authority and the liquidation audit report issued by auditor; and
- closure of the bank accounts after the remaining fund has been distributed.
- Conclusion
In the circumstances where a FIE encounters deadlock between shareholders, lack of market competitiveness, significant increase in expenses and costs or regulatory obstacles, voluntary dissolution may become an inevitable exit option. A more effective and streamlined dissolution mechanism has been adopted by the recent laws and practices. A FIE can be dissolved and deregistered within a period much shorter than the time required under the previous mechanism; and the documents required for dissolution and deregistration become less. Despite of the simplification, foreign investor seeking exit via voluntary dissolution still needs to ensure its strict compliance with the procedures set forth in the applicable regulations as failing to do so, it would expose itself to several and joint liabilities towards the FIE’s indebtedness.
For further information, please contact:
Simon Li, AnJie law firm
lixiameng@anjielaw.com
