Voluntary, compulsory liquidation of foreign-invested enterprises

The Supreme People’s Court (SPC) held a news conference in Beijing on 3 August 2017. According to the figures then disclosed by the SPC, 53.8% more bankruptcy cases were accepted nationally in 2016 compared with 2015, with a total of 3,602 bankruptcy cases concluded.

As at 31 July 2017, courts nationwide had accepted more than 4,700 compulsory corporate liquidation and bankruptcy cases, and concluded 1,923. Among those, compulsory liquidations of foreign-invested enterprises have been trending upwards year-on-year. The authors will discuss the similarities and differences in the voluntary and compulsory liquidation of foreign-invested enterprises in light of their firm’s experience.

DIFFERENT PROVISIONS

Generally speaking, the term “foreign-invested enterprise” refers to three types of enterprises: Sino-foreign equity joint ventures; Sino-foreign co-operative joint ventures; and wholly foreign-owned enterprises established in China in accordance with the law. The term may also be extended to include foreign-invested joint stock limited companies, foreign-invested partnerships, etc.

Voluntary liquidation of a foreign-invested enterprise, which refers to the shareholders of such enterprise deciding at their own discretion to carry out liquidation, is specifically subject to the first, second and third paragraphs of article 180 of the Company Law. This is directly manifested in the shareholders of the foreign-invested enterprise being required to issue at their own discretion a liquidation resolution or decision.

For example, pursuant to the above-mentioned provisions, the grounds for dissolution of the company may include any of the following: (1) the term of operation specified in the company’s articles of association expires, or another reason for dissolution as specified in the company’s articles of association arises; (2) the shareholders’ meeting or the shareholders’ general meeting resolves to dissolve the company; (3) the company needs to be dissolved due to a merger or division; or (4) the company has had its business licence revoked, is ordered to close down, or is closed down in accordance with the law.

The compulsory liquidation of a foreign-invested enterprise is subject to articles 182 and 183 of the Company Law and relevant provisions 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 (2). The three principal instances of this are set out below:

1. Grounds as set out in article 180 of the Company Law arises, but there is a failure to establish a liquidation committee within the specified period of time;
2. Although a liquidation committee is established, it deliberately prolongs the liquidation, or another illegality in the liquidation exists such that the interests of creditors or the shareholders could be materially harmed; or
3. Governance of the company is stalemated and its continued existence would cause material harm to the interests of the shareholders, and the matter cannot be resolved by other means.

Compulsory liquidation must be brought to a People’s Court, and the entity applying for such liquidation is usually a shareholder or creditor of the company. At the time of filing, submission of an application for liquidation is required.

In short, voluntary liquidation is usually an act taken by the shareholders at their own discretion, whereas compulsory liquidation is usually an act of last resort on the part of the shareholders or creditors.

DIFFERENCE IN ASSET SITUATION

In a case of voluntary liquidation, the shareholders will usually prepare a budget before the liquidation and make advance arrangements for the payment of the company’s debts (particularly payment of the severance pay of employees), so as to ensure that the assets are sufficient to cover the debts.

The most basic feature of so-called voluntary liquidation is that the company can discharge all of its debts. In practice, many foreign-invested enterprises will carry out a capital increase before commencing voluntary liquidation to avoid a situation where their assets are insufficient to cover their debts.

Whether a compulsory liquidation proceeds smoothly or not is similarly dependent on whether the assets are sufficient to cover the debts. If a company’s assets remaining after liquidation are insufficient to discharge its debts, the procedure will be unable to move forward, leaving bankruptcy liquidation as the only option.

DIFFERENT PROCEDURES

The greatest difference between foreign-invested enterprises and wholly Chinese-owned enterprises in current Chinese law is whether they are required to carry out approval or recordal with the competent commerce authority, and this is also the case specifically to the liquidation stage. That such a specific provision exists is down to the issue of market access by foreign-invested enterprises.

Of course, with the issuance of the Interim Administrative Measures for the Recordal of the Establishment of, and Changes to, Foreign-Invested Enterprises (as Amended in 2017) and revision of a series of laws and regulations on foreign-invested enterprises, an increasing number of matters are now subject to recordal rather than approval.

With respect to the voluntary and compulsory liquidation of foreign-invested enterprises: when a foreign-invested enterprise undergoes voluntary liquidation, recordal is required. As for whether recordal is required in the event of compulsory liquidation, the law is silent, but as compulsory liquidation also involves such matters as deregistration, we would recommend that the recordal must be carried out when a foreign-invested enterprise undergoes compulsory liquidation. Additionally, the acceptance and conclusion of a compulsory liquidation case requires the rendering of a ruling by the People’s Court.

Voluntary liquidation usually proceeds at the wish of the shareholders, whereas compulsory liquidation is specifically carried out by the liquidation committee under the control of the People’s Court.