In some cases, the foreign investors would find it commercially impossible to maintain its structure in China and may decide to shut down permanently its Chinese affiliates. Legally speaking, a closure of company will go through three phases: dissolution, liquidation and deregistration.
A company may enter into a dissolution voluntarily, or involuntarily upon decision of the registration authority or the court. In the event of voluntary early dissolution, key action is for the shareholder(s) to make a decision or resolution to early dissolve the company.
To ensure a smooth liquidation and deregistration process, an extra status check could be anticipated before the shareholder decision. Purpose of such extra status check is to scan, identify and remove any existing major issues that may block the subsequent formalities, including: whether all the licenses and stamps of the company are properly kept, whether a constant cooperation of the key persons could be secured, whether there is any existing incompliance or abnormalities with diverse authorities, status of any subsidiaries or branches, separation and retention of employees, etc. According to the obstacles identified, arrangement could be made in advance to avoid any redo of work due to unexpected surprises.
In practice, in the abovementioned process, the most challenging task is to lay off the employees legally and smoothly. Particularly, for manufacturing companies having hundreds or even thousands of employees, how to, on the one hand, gradually reduce the employees, and on the other hand, meet the remaining operational need of the company, and above all to avoid labor disputes and not jeopardize the consequent liquidation and deregistration procedures is a very sophisticated work. Our experience shows that companies must invest a reasonable budget to implement redundancies, but at the same time be mindful of their strengths and leverage when negotiating with employees.
After the decision of early dissolution is made, the company will enter into the phase of liquidation, for which purpose, a liquidation team shall be established within 15 days and filed to the registration authority. For a limited liability company, its liquidation team shall be composed of the shareholder(s) and where any shareholder is a company, it may appoint natural persons to participate in detailed liquidation work on its behalf.
In the phase of liquidation, the main work content of the liquidation team is to liquidate the company’s assets, debts and credits, and to solve any pending business. More precisely:
- The liquidation team shall inform the creditors within 10 days upon its establishment, and make a public announcement to creditors on the newspaper or in the system of national enterprise credit and information publication within 60 days;
- The liquidation team shall liquidate the company assets, debts and credits, settle any pending business, pay the due and unpaid taxes and fines (if any) with the tax authority and the customs, return and destroy any remaining invoices and tax control devices, etc.;
- After the liquidation of the company assets, the formulation of balance sheet and assets list, the liquidation team shall prepare a liquidation plan and submit to the shareholder(s) for validation. Remaining assets of the company, after payment of liquidation expenses, employee wages, social insurance premiums and statutory indemnity premiums, outstanding taxes and outstanding debts, may be distributed to the shareholder(s);
- After the completion of all the liquidation activities, the liquidation team shall prepare a liquidation report for validation of the shareholder(s). In an ordinary deregistration procedure, the validated liquidation report shall be further submitted to the registration authority.
In practice, the employees not already separated through amicable negotiation in the dissolution preparation phase as described above may be unilaterally laid off by the company at this stage. However, if employees bring up lawsuits against the company, the proceedings as such will impede the finalization of the liquidation. The same applies if the company has unsettled administrative liabilities, such as taxes, fines, on-going administrative investigations by the authorities etc.
After the completion of liquidation, a company may file the deregistration applications to diverse registration authorities. Two types of deregistration are allowed: ordinary deregistration, and simplified deregistration.
Ordinary deregistration. An ordinary deregistration is the classic way of deregistration, applicable for all types of enterprises. In the course of an ordinary deregistration, the enterprise is subject to a period of public announcement to creditors for 45 days.
Within the 45 days, the company may proceed to file the deregistration applications to tax bureau; for company with import-export business, the deregistration application with the customs may be filed in parallel. In case any abnormalities are found by the authorities during the examination (including any due and unpaid taxes and tariff), such abnormalities shall be rectified. Where the authorities are satisfied with the record and application documents of the company, relevant deregistration certifications (tax clearance certification, etc.) will be issued.
After the completion of tax deregistration and the expiration of the period of public announcement, the company shall file a deregistration application with the administration for market regulation. The business license will be returned to the authority and the company will be officially terminated.
Further to the deregistration with the administration for market regulation, the company shall complete the deregistration formalities related to social insurance and public provident funds, remit the remaining bank deposit to the investors and close the bank accounts.
In practice, deregistration with tax bureau is usually the one with greater uncertainties. In examining the application from the taxpayer, if any ambiguity is found, the tax bureau may initiate an inspection and look up the relevant materials. If this happens, the deregistration procedures may be delayed for a long, indeterminate period of time (several months normally).
Simplified deregistration. Simplified deregistration is put into application since 2015 in China and aims at providing an easier exit for the enterprises with deregistration needs and simple and clear debt relations.
Compared to an ordinary deregistration, the simplified deregistration has a shorter period of public announcement to the creditors of 20 days. The application for simplified deregistration will be sent automatically to the tax bureau for their examination of tax status, and therefore the company does not need to file a specific application for tax clearance certificate to the tax bureau. If within the public announcement period no objection is received from the governmental authorities or a stakeholder, the company may proceed to file the deregistration with the administration for market regulation directly.
However, not all companies are qualified for a simplified deregistration. The unqualifying circumstances include:
- The company is a foreign-invested company subject to the special administrative measures for market access as prescribed by the State (“negative list”);
- The company is included in the list of enterprises with abnormal operation, or the list of enterprises with serious breaches of laws and discredited enterprises;
- The company’s equities are frozen or pledged or its movables are mortgaged;
- The company is being placed on file for investigation or subject to any administrative enforcement, judicial assistance or administrative punishment;
- Any of the company’s branches is not deregistered;
- The company’s previous simplified deregistration was terminated;
- The company is legally required to obtain a prior approval before deregistration; or
- Any other circumstances preventing a company from a simplified deregistration.
Where a company chooses the path of simplified deregistration in haste but is found to be unqualified for such procedure, and cannot gain the qualification within the given time, the simplified deregistration may risk being rejected, and the company might need to reapply for an ordinary deregistration and wait through the normal public announcement period of 45 days. As in practice, the detailed criteria for a simplified deregistration may vary from place to place, it is advisable to examine the possibility of applying a simplified procedure before the official application.
Click here to read the first part of this Newsletter.