Welcome everyone to another edition of my China Tech Law Newsletter. Today’s topic is not necessarily a happy one, but it is a necessary one for some companies these days. Liquidations, yes, they are complicated in China but also manageable.
I want to just hit the high level points, for more details please reach out to me separately.
(1) Timing. First the most common question, timing. Short answer, the time frame can be about 9-12 months, not as slow as you might expect.
(2) Committee. You’ll need to come up with an internal plan and a liquidation committee. If the shareholders are for all intents and purposes "checked out" already, they still need to handle liquidating the company because creditors can come after you, and a court can appoint an administrator. Not to mention you run the risk of being blacklisted from doing further business in China if you have essentially a dormant entity (and especially if not making mandatory statutory filings).
(3) Notify Creditors. You’ll need to publicly notify potential creditors. Similar to other countries.
Speaking of creditors, as you start inching towards insolvency, you need to mentally shift. Your main stakeholders switch from being your shareholders to your creditors.
Note the priority of claim over assets for a liquidating company:
(a) Liquidation expenses
(b) Employee salaries and social security payments owed
(c) Unpaid tax liabilities
(d) Other debts owed (remember creditors include both lenders and suppliers)
(4) Handling Employees. Reasons for closure might include merger, relocation, or economic distress. For employees, you can do mass layoffs but your employees likely will have seen it coming. They may not be expecting much, but there will always be “stragglers” who want to hold out for leverage.
(5) Tax Clearance. The biggest and longest step in this process, expected to take about 6 months, is the official tax clearance. All taxes owed, including corporate income tax, value-added tax, and even personal income tax for employees will be checked to see if properly withheld and remitted. This is done through an external audit by a local accounting firm.
For the Tax Bureau, it's similar to when you have ever (God forbid) tried to move across different districts in a city (such as Shanghai or Beijing) and had to dealt with the tax folks, hey it’s their last bite at the apple. What do you expect?
SIDE NOTE: A quick side note about moving districts within a city. Sometimes you just can’t get the tax clearance to be able to actually relocate your entity and sign a lease and conduct business in another district. And incredibly you may actually have to liquidate the original entity, setup a new company, and transfer all assets over (employees, contracts, etc.) Its crazy, I know. And yes, sometimes it’s the only way to make it happen.
Finally, I want to emphasize again. You really should take the time to properly shut down the company. Although civil and even criminal liability are theoretically possible, the real risk is restrictions on travel to and from China, as well as being on a blacklist for setting up a new company in the future. As you can probably guess, the legal representative is particularly vulnerable here.
That’s it for a short post and another edition of my China Tech Law Newsletter. Thanks everyone for reading, subscribing, and sharing on these posts! Always much appreciated.
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