Lawyer:Chen Yujia
Practice Focus:ODI,FDI,M&A
Email:chenyujia@yunya.com.cn
Since the beginning of 2020, the production and operation of many enterprises have been greatly affected because of the outbreak of COVID-19. In this situation, some enterprises will choose to dissolve to reduce losses. This article will briefly describe the legal process of Chinese companies』 liquidation and the legal risks of the liquidation group and the Liquidation obligors (Shareholders of a limited liability company, directors or the controlling shareholder of a joint-stock company, or the actual controller of Company) according to the relevant provisions of Company Law.
The liquidation process of foreign-invested enterprises is consistent with that of domestic enterprises under the current laws and regulations.
The basic process of liquidation is shown asfollows:
This article will make abrief analysis of Company's liquidation process and the legal responsibilitiesof the liquidation obligors and the liquidation group.
Causes of dissolution
Chinese laws stipulatevarious causes for the dissolution of Company, and the self-liquidation ofCompany falls under the circumstance of dissolution decided by shareholdersor the general meeting of shareholders.
Step 1: Establish the liquidation group
a. Time limit for the establishment of the liquidation group
Company shall establish aliquidation group within 15 days after the shareholders' meeting or generalmeeting makes a dissolution resolution. If Company fails to set up aliquidation group within the above time limit, Company's creditors may petitionthe people's court to appoint appropriate individuals to form a liquidationgroup.
b. Members of the liquidation group
Chinese Company Lawstipulates that the liquidation group of a limited liability company shallbe its shareholder(s), and the liquidation group of a joint stock limitedcompany shall be composed of directors or individuals determined by the generalmeeting of shareholders.
However, according toour experience, when the shareholder(s) is/ are companies, some governmentdepartments require that the liquidation group must be composed of naturalpersons.
c. Functions of the liquidation group
● Liquidate Company's assets and produce abalance sheet and schedule of assets;
● Notify Company'screditors by way of notice or public announcement;
● Manage andclear the remaining business of Company;
● Payoutstanding taxes and any tax liability incurred in the course of theliquidation;
● Pay Company'saccounts payable and recover its accounts receivable;
● Dispose ofCompany's residual assets; and
● Represent Companyin any civil litigation to which it is a party.
d. The differences between the liquidation obligors andmembers of the liquidation group
The difference between theliquidation obligors and the members of the liquidation group is that theliquidation obligors are responsible for starting the liquidation procedure,while the liquidation group is responsible for dealing with the liquidation issues.
i. Legal liabilities of members of the liquidation group
The members of aliquidation group shall, during the course of liquidation, carry out theirduties and perform their obligations in accordance with the law.
No member of a liquidation group may takeadvantage of his position to take any bribe or any other unlawful payment, normay he misappropriate any Company asset.
Any member of a liquidation group who causesany loss to Company or to any of its creditors either intentionally or due tohis gross negligence shall be liable to compensate the affected party.
Example: If the liquidation group fails to fulfill theobligation of written notification to creditors within the statutory timelimit, the members shall assume relevant responsibilities. This situationillustrates the importance of creditor's notification (See step 3). Theliquidation group must comprehensively sort out the creditors』 information inthe creditor’s notification to avoid omission.
ii. Legal liabilities of the liquidationobligors
a). Where failure toestablish a liquidation group within the statutory time limit and tocommence the relevant liquidation work by the liquidation obligors result in any impairment, drain, or the destruction orloss of Company's properties and any creditor of Company can assert that the liquidation obligors shall be responsible for the debts of Company to theextent of any loss caused by them.
b). Where any delay inthe performance of obligations by theliquidation obligors results in the loss ofthe main properties, account books, material documents or other things of Companyand in an impossibility of liquidation of Company and any creditor of Company canassert that the liquidation obligors shall be severally and jointly responsible for thedebts of Company.
c). Where the liquidation obligors cause any loss to the creditors of Companyas a result of any malignant disposition of Company's properties uponthe dissolution of Company or without carrying out the relevant liquidationwork in accordance with the law, goes through the registration formalities forlegal person cancellation by deceiving an company registration authoritywith a false liquidation report and any creditor of Company can assert thatthe liquidation obligors shall bear corresponding liabilities for the debts of Company.
d). After the relevantliquidation procedures are completed upon the dissolution of a company, acancellation registration for Company shall be applied for. Where the liquidation obligors make a cancellation registration for Company without goingthrough the relevant liquidation procedures, leading to an impossibility of the liquidation of Company,and any creditor of Company can assert that the liquidation obligors shall be responsible for repaying the debts of Company.
Step 2: Creditor’s notice
A liquidation group shall,within 10 days of its formation, notify Company's creditors of itsformation, and shall make a public announcement in a newspaper on the formationof a liquidation group within 60 days of its formation. Any creditorshall, within 30 days of receipt of a notice or within 45 days of the publicannouncement in the event that the relevant creditor does not receive a notice,make a claim to the liquidation group on the debt owed to it/him.
In making a claim for any debt outstanding, acreditor shall describe the relevant details and provide supporting evidence.The liquidation group shall record all debts claimed.
The liquidation groupmay not repay any creditor during the debt claim period.
Step 3: Drafta liquidation plan
A liquidation group shall,after liquidating the assets of Company and producing a balance sheet andschedule of assets, draft a liquidation plan and present it to the board ofshareholders or the general meeting or to the people's court for confirmation.
Any remaining assets afterpayment of liquidation expenses, employee wages, social insurance premiums andstatutory indemnity premiums, outstanding taxes and outstanding debts may, incase of a limited liability company, be distributed to shareholders on a prorata basis in accordance with the respective proportion of capital contributedby each shareholder or, in case of a joint stock limited company, distributedon a pro rata basis in accordance with the respective proportion of stock heldby each shareholder.
A company in liquidation shall continue inexistence during the course of the liquidation but may not conduct any newbusiness unconnected with the liquidation. No company assets may be distributedto any shareholder before being applied as described in the previous paragraph.
Step 4: Apply for thecancellation of the registration of Company
On completion of any companyliquidation, the liquidation group shall draft a liquidation reportshall submit it to Company registration authority to apply for thecancellation of the registration of Company. The liquidation group shallalso make a public announcement about the fact that Company has beenterminated.
To sum up, this article onlybriefly introduces and analyzes Company's dissolution process according toChinese laws and regulations. In the period of dissolution, there are manyother legal issues, such as: the calculation of severance pay, retainmentissues of employees, negotiation with employees, residual property distributionand other issues which require Company to strictly handle according to relevantlaws and regulations before making liquidation decisions and in the wholeliquidation process.
For more detailedinformation, please refer to the Chinese article .