The article was first published in Asian-Counsel magazine,
issue April 2008
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.
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
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).
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.
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The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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