China: New Rules Governing Dissolution And Liquidation

Last Updated: 8 July 2008
Article by Jenna Wang-Metzner

The article was first published in Asian-Counsel magazine, issue July/August 2008

1. General

On 5 May 2008, the Ministry of Commerce of the People's Republic of China ("PRC") issued the Guiding Opinion on the Dissolution and Liquidation of Foreign Invested Enterprises ("Dissolution Opinion"). The Dissolution Opinion stipulates that, after the abolishment of the Regulations Governing the Liquidation of Foreign Invested Enterprises as of 15 January 2008, dissolution and liquidation of foreign invested enterprises ("FIEs") shall be carried out in accordance with the Company Law and relevant laws and administrative regulations on foreign investment.

On 20 May 2008, the Supreme Court of the PRC promulgated the Second Judicial Interpretation on the PRC Company Law ("Second Judicial Interpretation"), which addresses legal issues about non-bankruptcy dissolution and liquidation of domestic and foreign invested limited liability companies and companies limited by shares.

2. Dissolution and Liquidation of a FIE upon Approval by the Examination and Approval Authority

The Dissolution Opinion states that an FIE dissolution or liquidation must follow the Company Law, but it also provides that aspects that are not covered in detail in the Company Law are subject to foreign investment laws and administrative regulations.

Based on this principle, the governing body of the FIE shall adopt a resolution on dissolution in case of termination of a FIE due to its inability to continue operations. The identified reasons are as follows: (1) heavy business losses, (2) heavy losses caused by force majeure events or the inability to obtain the desired objectives of the cooperation (in case of joint venture companies) and, at the same time, lack of prospects for future development; and (3) the occurrence of other reasons for dissolution as prescribed by the joint venture contract or the articles of association. The approval certificate and business license of the FIE shall be submitted to the authority together with the application for dissolution.

Further, if a Sino-foreign contractual or equity joint venture is unable to continue its operations due to the failure of one of partners to fulfill the obligations prescribed in the joint venture contract or articles of association, the party that is not in breach may unilaterally file a dissolution application. It may also pursue a judgment by a People's Court or an arbitration award concerning the failure of the other party.

The examination and approval authority shall review the application and, if appropriate, approve the dissolution of the FIE within ten working days upon the receipt of the application. This is followed by a notification of the dissolution of the FIE in the national foreign-funded enterprise examination and approval management system. The FIE shall form a liquidation committee within 15 working days after the approval is issued and commence liquidation procedures.

3. Dissolution and Liquidation through Court Procedures

According to Article 1 of the Second Judicial interpretation, any shareholders who separately or aggregately hold 10% or more of all the shareholders' voting rights of an FIE may file a dissolution case, and the People's Court shall accept such case, under any of the following circumstances:

(1) The company can not hold shareholders' meeting for two or more consecutive years, and the company is encountering serious difficulty in its business management;

(2) Shareholder votes can not reach the statutory proportion or the proportion set down in the articles of association of the company, shareholders' meetings can not pass any valid resolutions for two or more consecutive years and the company is encountering serious difficulty in its business management;

(3) The directors of the company are in conflict for a long time, the shareholders' meeting can not form any resolutions to solve such conflict and the company is encountering serious difficulty in its business management;

(4) The company encounters any other kind of serious difficulties in its business management and the continued existence of the company would cause major damage the interests of the shareholders.

When a shareholder files a dissolution case it shall notify the other shareholders, or the People's Court will notify the other shareholders, to allow their participation in the litigation. The company shall act as the defendant.

Article 5 of the Second Judicial Interpretation requests the People's Court to give priority to mediation when hearing a company dissolution case. If the parties can not maintain the company as a going concern through negotiation, the Court shall render a judgment in a timely manner.

If the FIE fails to form such liquidation committee within 15 days of the dissolution judgment or deliberately delays the liquidation, or if an illegal liquidation may seriously damage the interests of creditors or shareholders, the Court shall accept an application filed by a creditor to designate a liquidation committee.

If the People's Court organizes liquidation of a FIE, the liquidation committee shall complete the liquidation within six months after its formation and shall apply for an extension if the liquidation can not be completed on time due to special circumstances. Deregistration of the dissolved company is the last step following liquidation.

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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