Most foreign businesses in China do very well and are profitable. However, there will be some that do not succeed commercially, or that may have to close because of external circumstances affecting their parent company overseas. In addition, some of the earliest businesses established since ”opening up and reform” will come to the end of their natural lives, maybe at the ten year point, and require to be wound up.
In these circumstances, the interests of a number of “stakeholders” need to be properly protected and balanced – shareholders, of course ; employees ; customers, creditors and debtors ; and the local authorities as regulators and tax collectors. The closure of a company may often provoke strong emotions and feelings of uncertainty for many of those involved, too.
There are of course regulations under Chinese law for how these processes should properly be carried out, to ensure that the company’s final bills are settled, tax is paid, staff are properly handled, and all the company’s remaining liabilities and statutory responsibilities are correctly discharged. In this month’s issue of ‘China Briefing’, we explain the procedures you would need to go through to close a foreign invested enterprise in China, and highlight the many related issues that you will need to address. We hope that you never have to go through the process, at least for negative reasons, but if you do, it must be done professionally and correctly.
COMPANY LAW AND THE LIQUIDATION PROCESS
[ By Zoe Zhou, Manager, Guangzhou office and Fiona Yuan, Manager, Shenzhen office, Dezan Shira & Associates ]
The procedures for closing a WFOE – its dissolution and liquidation - are no easier or shorter than the process of setting up such a company, and normally take between six to nine months to complete.
According to PRC law, a WFOE must be dissolved if any of the following circumstances apply :
- Its term of operation expires.
- It experiences financial difficulties and the Board deems it necessary to dissolve the company.
- It is unable to carry out its business due to major losses caused by force majeure.
- It is bankrupt.
- It is terminated by the government, for example because it commits illegal acts damaging the public interest.
- Other reasons for dissolution stipulated in the original Articles of Association have occurred.
