The article was first published in Asian-Counsel magazine, issue April 2008 www.pbpress.com
The basic legal framework for company liquidation in the People's Republic of China ("PRC") is provided for the PRC Company Law ("CL") for non-bankruptcy liquidation of domestic limited liability and companies limited by shares, while the "Regulations Governing the Liquidation of Foreign Invested Enterprises ("FIEs") in the PRC" ("Liquidation Regulations"), which came into force on 9 July 1996, until late formed the legal basis for the specific non-bankruptcy liquidation of FIEs.
On 15 January 2008, the State Council has issued Decree 516 abolishing the Liquidation Regulations and stating as the reason for issuance of Decree 516 the promulgation of the PRC Company Law ("CL") on 27 October 2005, which became effective on 1 January 2006. The discrepancies between the Liquidation Regulations and the EBL/CL have been discussed for quite a while and thus Decree 516 delivers long awaited clarification for the liquidation of FIEs.
For liquidation caused by bankruptcy, the PRC has enacted unified bankruptcy legislation and promulgated the PRC Enterprise Bankruptcy Law ("EBL"), effective as of 1 June 2007. While generally speaking all enterprise legal persons (with special provisions for financial institutions) as well as organizations other than enterprise legal persons fall within the category of bankruptcy liquidation are subject to the EBL, it remained unclear whether the EBL would also directly apply to the bankruptcy of foreign-invested enterprises ("FIEs"), which mostly qualify as enterprise legal persons (except for certain contractual joint ventures) but for whom still also the Liquidation Regulations of the year 1996 remained effective.
Bankruptcy Liquidation
Under the EBL, debtors can apply for liquidation, restructuring or conciliation based on the following grounds: (1) failure to clear debt as due, (2) insufficient assets to repay all debt, (3) obvious incapability to clear debts, or (4) likelihood of inability to repay debt, while creditors may likewise make such application for reason (1) above, however, being compelled to establish the inability of receiving payments.
With regard to secured claims for due wages/social insurance, if these have incurred prior to 1 June 2007, the staff shall take part in the proceeds of the assets distribution on a priority basis after insolvency costs and expenses have been covered. If the staff is not repaid in full, the balance of their claims shall be repaid through realization of the secured assets prior to the secured creditors, who only thereafter enjoy the proceeds of their secured assets. On the contrary for wages/social security claims incurred after 1 June 2007, the staff shall only have a priority right against the secured creditors with regard to the realization of unsecured assets of the debtor. Any proceeds of secured assets belong to the secured creditors on a priority basis.
After payment of liquidation expenses, salaries, social insurance and severance payments for employees, taxes as well as settlement of liabilities, the remaining assets of the company shall be distributed by the liquidation committee to the shareholders according to their equity or share ratio (this applies in analogy to non-bankruptcy liquidation).
Non-Bankruptcy Liquidation
Under the CL, a company may be dissolved if: (1)The operation term as provided by the articles of association of the company expires or other circumstances giving reason for dissolution provided by the articles of association of the company occur, (2) the shareholders resolve to dissolve the company, (3) dissolution is required due to a merger or split of the company, (4) the company is lawfully deprived of its business license, ordered to close or the business license is withdrawn, or (5) a People's Court issues a judgment ordering the dissolution of the company upon application of shareholders holding at least ten percent (10%) voting rights in case of severe difficulty in operation of the company (i.e. to continue operation may cause substantial losses to the interests of the shareholders).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
