Procedure for compulsory liquidation of partnership PE funds

By Zhu Rui and Qin Yu, Grandway Law Offices
0
432
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Compulsory liquidation is one of the most important ways for companies to exit the market and is an essential protection for creditors or shareholders of the company. This article focuses on the rules and procedures for the compulsory liquidation of partnership private equity funds.

APPLICATION OF COMPULSORY LIQUIDATION

(1) Direct compulsory liquidation of general partner is not allowed. Pursuant to article 86 of the Partnership Enterprise Law, the liquidation report involves the rights and interests of all partners and requires their signatures or seals, and does not grant the partnership agreement the discretionary right to agree. Pursuant to article 153 of the Civil Code, a civil legal act that violates the mandatory provisions of a law or administrative regulation is invalid. Accordingly, regardless if a partnership agreement provides that “pursuant to the partnership agreement, the liquidator is directly acted by the general partner, rather than selected, and the liquidation documents shall only require the signature of the general partner”, or other similar statements, it is not possible to directly authorise the general partner to exercise such a signing right based on this agreement.

(2) Partnership PE funds can be compulsorily liquidated. The third paragraph of article 86 of the Partnership Law provides: “Within 15 days after the occurrence of the cause for the dissolution of the partnership, the partners or other interested parties may apply to the people’s court to designate liquidators.”

Procedure for compulsory liquidation of partnership PE funds
Zhu Rui
Partner
Grandway Law Offices

In addition to applying the Partnership Law, reference may be made to relevant provisions of Company Law for liquidating the partnership fund. In practice, where certain partners fail to liquidate the partnership in accordance with regulations after the occurrence of the cause for the dissolution, courts also recognise that the other partners have the right to petition for compulsory judicial liquidation.

Pursuant to article 7 of the Regulations of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (II), a creditor or shareholder may petition the court for a compulsory liquidation of the company if: “the company is dissolved but a liquidation committee is not established within the prescribed delay to carry out liquidation; a liquidation committee is established but the liquidation is deliberately delayed; or an unlawful liquidation could materially harm the interests of the creditor or shareholder.”

Referring to the above-mentioned provision, where a partnership faces any of these circumstances, a creditor or partner may petition the court for a compulsory liquidation of the partnership. In addition to the three circumstances mentioned, in practice, if the liquidation plan, liquidation report or other such matter fails to be passed by the shareholders’ meeting or the partners’ general meeting ‒ i.e., a “self-liquidation deadlock” ‒ this can lead to the compulsory liquidation of a fund.

RULES FOR COMPULSORY LIQUIDATION

As China’s laws and regulations are silent on the specific procedure for the compulsory liquidation of a partnership, reference should, in principle, be made to the rules for the compulsory liquidation of companies, more specifically:

Procedure for compulsory liquidation of partnership PE funds
Qin Yu
Paralegal
Grandway Law Offices

(1) Jurisdiction of compulsory liquidation cases. Article 24 of the above-mentioned regulations provides that the local People’s Courts of a company’s domicile have jurisdiction over its compulsory liquidation case. Basic-level People’s Courts have jurisdiction over compulsory liquidation cases involving companies approved and registered by the company registrar of a county, county-level municipality or district; and Intermediate People’s Courts have jurisdiction over compulsory liquidation cases involving companies approved and registered by the company registrar of a prefecture, prefectural-level municipality or above.

(2) Petitioner and respondent in a compulsory liquidation case. As a special procedure in the Civil Procedure Law, a compulsory liquidation procedure is not a litigation procedure, rather, the petitioner submits a petition to the court and the court, after ruling to accept the same in accordance with the law, proceeds to examine whether there is a dispute over the causes for the compulsory liquidation and, if not, starts the compulsory liquidation procedure. In a compulsory liquidation case of a partnership PE fund, the partner is the petitioner and the partnership is the respondent.

SPECIFIC PROCEDURES

    1. A partner petitions the court for compulsory liquidation, naming the partnership as the respondent, and applies for the determination of a liquidator to conduct the compulsory liquidation of the partnership.
    2. The court issues a written ruling accepting the petition for a compulsory liquidation of the respondent. This procedure requires about two months.
    3. The court issues a written decision designating the liquidation committee and the person in charge, and a notice informing the respondent and relevant persons of the legal obligations they must perform before the liquidation’s conclusion. This procedure requires about two months.
    4. The liquidation committee notifies the respondent’s creditors of the deadline for reporting their claims, the legal consequences of late reporting, the materials to be submitted for reporting, the time and place, etc. If the claims against the enterprise are simple, this procedure requires about one month.
    5. The liquidation committee calls a creditors’ meeting or informs the reporting creditors in writing to confirm the liquidation plan. The time required for this procedure depends on the complexity of the case.
    6. The plan is confirmed in a written civil ruling issued by the court and then executed by the liquidation committee. This procedure requires about one month.
    7. After setting aside the liquidation expenses, the liquidation team disposes of the respondent’s remaining property in the following sequence: employees’ wages; social insurance premiums and statutory severance; payment of outstanding taxes; discharge of the respondent’s debts; and distribution of the remaining property. The time required for this procedure depends on the complexity of the case.
    8. The liquidator prepares and submits the liquidation report to the court for confirmation. This procedure requires about one month.
    9. The court issues a written ruling confirming the liquidation report and concluding the liquidation procedure.
    10. After receipt of the court ruling, the liquidation committee cancels the respondent’s tax registration with the tax registrar and deregisters the respondent’s corporate legal personality with the business registrar on the strength of the ruling, and announces the termination of the respondent.

Zhu Rui is a partner and Qin Yu is a paralegal at Grandway Law Offices

domestic capital

Grandway Law Offices
7-8/F News Plaza
No. 26, Jianguomennei Avenue
Beijing, 100005, China

Tel: +86 10 8800 4488
Fax: +86 10 6609 0016

E-mail: zhurui@grandwaylaw.com
qinyu@grandwaylaw.com

www.grandwaylaw.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link