All companies established in China, including foreign-invested enterprises, are obligated to follow certain procedures in accordance with China’s Company Law in order to wind up and dissolve their operations. In recent years, a number of foreign investors in China have abandoned their Chinese operations and fled the country, leaving behind bank loans and other unpaid debt and failing to pay salaries to their Chinese workers. Starting with a handful of cases, this problem has worsened by the current global financial crisis.
To combat the increasing problem of “runaway foreign investors,” the Chinese government has issued new rules intended to ensure the orderly departure of foreign investors wishing to wind up their Chinese investments. Jointly issued by the Ministry of Commerce, Ministry of Foreign Affairs, Ministry of Public Security and Ministry of Justice, the “Working Guidelines on Cross-Border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with Abnormal Withdrawal from China By Foreign Investors” was issued on November 19, 2008. Under these new rules, it is easier for Chinese parties to sue foreign investors attempting to wind up operations in China.
In addition to new legal liabilities, “runaway foreign investors” will find it virtually impossible to invest in China again, or even to do business in the Chinese market. For example, foreign investors deemed as “runaways” would be deemed as disreputable by Chinese banks, making it impossible to receive loans for any future Chinese investments. Foreign investors who cause losses to creditors by failing to lawfully dissolve their Chinese operations shall also be liable to civil actions seeking damages for such losses.
The new rules also facilitate increased judicial and law enforcement cooperation n connection with multi-jurisdictional civil lawsuits, especially with countries that have entered into legal cooperation treaties with China, such as the United States, Canada, France, South Korea and Australia. These treaties provide for cooperation in investigating and bringing legal actions in civil and criminal cases, as well as the means for seeking extradition of suspects wanted in China. Central government organs in China will, based on the terms of such bilateral treaties, seek judicial assistance from foreign governments for the benefit of securing the legal rights of interested parties in China.
Rather than attempt to flee, foreign investors who intend to withdraw their investments in China should instead follow legal dissolution procedures, including:
- Submit an application to relevant government authorities seeking permission for dissolution;
- Establish a Liquidation Committee to carry out liquidation.
- Notify known creditors, as well as unknown creditors by means of a public announcement in a Chinese newspaper.
- Following liquidation, cancel various registrations with different government agencies and bureaus.
Unlike other countries such as the United States and Canada, the dissolution process for a Chinese company can be complicated and lengthy. However, lawfully dissolving Chinese companies is the most desirable and appropriate solution for foreign investors seeking to repatriate their overseas assets.