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.
This article will make a brief analysis of Company's liquidation process and the legal responsibilities of the liquidation obligors and the liquidation group.
Causes of dissolution
Chinese laws stipulate various causes for the dissolution of Company, and the self-liquidation of Company falls under the circumstance of dissolution decided by shareholders or the general meeting of shareholders.
Step 1: Establish the liquidation group
a.Time limit for the establishment of the liquidation group
Company shall establish a liquidation group within 15 days after the shareholders' meeting or general meeting makes a dissolution resolution. If Company fails to set up a liquidation group within the above time limit, Company's creditors may petition the people's court to appoint appropriate individuals to form a liquidation group.
b.Members of the liquidation group
Chinese Company Law stipulates that the liquidation group of a limited liability company shall be its shareholder(s), and the liquidation group of a joint stock limited company shall be composed of directors or individuals determined by the general meeting of shareholders.
However, according to our experience, when the shareholder(s) is/ are companies, some government departments require that the liquidation group must be composed of natural persons.
c.Functions of the liquidation group
● Liquidate Company's assets and produce a balance sheet and schedule of assets;
● Notify Company's creditors by way of notice or public announcement;
● Manage and clear the remaining business of Company;
● Pay outstanding taxes and any tax liability incurred in the course of the liquidation;
● Pay Company's accounts payable and recover its accounts receivable;
● Dispose of Company's residual assets; and
● Represent Company in any civil litigation to which it is a party.
d.The differences between the liquidation obligors and members of the liquidation group
The difference between the liquidation obligors and the members of the liquidation group is that the liquidation 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 a liquidation group shall, during the course of liquidation, carry out their duties and perform their obligations in accordance with the law.
No member of a liquidation group may take advantage of his position to take any bribe or any other unlawful payment, nor may he misappropriate any Company asset.
Any member of a liquidation group who causes any loss to Company or to any of its creditors either intentionally or due to his gross negligence shall be liable to compensate the affected party.
Example: If the liquidation group fails to fulfill the obligation of written notification to creditors within the statutory time limit, the members shall assume relevant responsibilities. This situation illustrates the importance of creditor's notification (See step 3). The liquidation group must comprehensively sort out the creditors’ information in the creditor’s notification to avoid omission.
ii. Legal liabilities of the liquidation obligors
a). Where failure to establish a liquidation group within the statutory time limit and to commence the relevant liquidation work by the liquidation obligors result in any impairment, drain, or the destruction or loss of Company's properties and any creditor of Company can assert that the liquidation obligors shall be responsible for the debts of Company to the extent of any loss caused by them.
b). Where any delay in the performance of obligations by the liquidation obligors results in the loss of the main properties, account books, material documents or other things of Company and in an impossibility of liquidation of Company and any creditor of Company can assert that the liquidation obligors shall be severally and jointly responsible for the debts of Company.
c). Where the liquidation obligors cause any loss to the creditors of Company as a result of any malignant disposition of Company's properties upon the dissolution of Company or without carrying out the relevant liquidation work in accordance with the law, goes through the registration formalities for legal person cancellation by deceiving an company registration authority with a false liquidation report and any creditor of Company can assert that the liquidation obligors shall bear corresponding liabilities for the debts of Company.
d). After the relevant liquidation procedures are completed upon the dissolution of a company, a cancellation registration for Company shall be applied for. Where the liquidation obligors make a cancellation registration for Company without going through 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 its formation, and shall make a public announcement in a newspaper on the formation of a liquidation group within 60 days of its formation. Any creditor shall, within 30 days of receipt of a notice or within 45 days of the public announcement 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, a creditor shall describe the relevant details and provide supporting evidence. The liquidation group shall record all debts claimed.
The liquidation group may not repay any creditor during the debt claim period.
Step 3: Draft a liquidation plan
A liquidation group shall, after liquidating the assets of Company and producing a balance sheet and schedule of assets, draft a liquidation plan and present it to the board of shareholders or the general meeting or to the people's court for confirmation.
Any remaining assets after payment of liquidation expenses, employee wages, social insurance premiums and statutory indemnity premiums, outstanding taxes and outstanding debts may, in case of a limited liability company, be distributed to shareholders on a pro rata basis in accordance with the respective proportion of capital contributed by each shareholder or, in case of a joint stock limited company, distributed on a pro rata basis in accordance with the respective proportion of stock held by each shareholder.
A company in liquidation shall continue in existence during the course of the liquidation but may not conduct any new business unconnected with the liquidation. No company assets may be distributed to any shareholder before being applied as described in the previous paragraph.
Step 4: Apply for the cancellation of the registration of Company
On completion of any company liquidation, the liquidation group shall draft a liquidation report shall submit it to Company registration authority to apply for the cancellation of the registration of Company. The liquidation group shall also make a public announcement about the fact that Company has been terminated.
To sum up, this article only briefly introduces and analyzes Company's dissolution process according to Chinese laws and regulations. In the period of dissolution, there are many other legal issues, such as: the calculation of severance pay, retainment issues of employees, negotiation with employees, residual property distribution and other issues which require Company to strictly handle according to relevant laws and regulations before making liquidation decisions and in the whole liquidation process.
For more detailed information, please refer to the Chinese article
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