Business Internet China - Risks in just “walking away” for foreign investors

Mar 08

Risks in just -walking away- for foreign investors

Reproduced with kind permission of China Briefing magazine

Risks in just “walking away” for foreign investors

As the saying goes - “happy families are all alike; every unhappy family is unhappy in its own way”.

It is the same for foreign investment in China. Though most foreign investments here are successful and generate considerable profits for their investors, some investors do wish to close down their businesses either because of poor profitability, global restructuring, or for some other reasons. However, can a foreign investor choose to just “walk away” if there are no substantial assets left in their business ? Will the investor who does so incur any liability that can be enforced against him or his other assets in China or elsewhere ?

So, can a foreign investor make a strategic retreat from their Chinese investment without being chased by the creditors ? The short answer, not surprisingly and quite properly, is “no”. This is a critical issue that must be considered not only during the closing down of a business, but also in the process of running of the enterprise.

Limited liability of FIEs and potential liabilities for foreign investors

Foreign invested enterprises (FIEs) such as WFOEs and JVs are independent legal persons and own their own assets and properties. The foreign investors, in principle, only bear the limited liability for their investment to the extent of their registered capital originally brought into China. However, under certain circumstances, foreign investors may be held personally liable for their investment activities beyond the capital contribution obligation. The potential liabilities applying to those foreign investors who “walk away” differ from those who face bankruptcy or voluntary liquidation.

Penalties for “walking away”

According to business registration regulations in China, it is the investor’s obligation to register properly when the business is created and update the registration authority in the event of any significant changes of circumstances. If a foreign invested company is being wound up, the foreign investor is required to de-register the company before they may take back any remaining assets of the company. In other words, you must tell the authorities.

De-registration is, as we explained earlier, triggered by the approval, by the Ministry of Commerce, of the winding up the business. The de-registration can only take place after the company has gone through liquidation procedure, as described above, including a liquidation audit, and the payment of any liabilities to the tax authorities, Customs, employees, and creditors.