How To Shut Down Your China Business?
March 25, 2009
On November 19, China’s Commerce, Foreign Affairs, Public Security and Justice, issued Working Guidelines on Cross-border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with Abnormal Withdrawal from China of Foreign Investors. The mere fact that these four ministries got together on this at the inception of massive factory shutdowns in China is a good indication of how important these guidelines are meant to be.
The aim of the guidelines is to prevent foreign-invested enterprises (FIEs), or more realistically the owners and managers that run them, from shutting down their China operations without “undertaking proper closure procedures” relating to “creditors, employees, and other affected parties.”
China’s Company Law states that foreign individual or corporate shareholders can, under certain circumstances, be held civilly liable for the obligations of their China company. In legal speak, this means that creditors may pierce the corporate veil to get at those who own and/or run the foreign company doing business in China.
Though leaving in the middle of the night has some obvious short term advantages, the reality is that the smarter long term decision will likely be to follow China’s company dissolution rules. There are a couple reasons for this. First, China claims it will pursue you for liability back in your home country. And though I have my doubts about their actual resolve and ability to do this, it certainly is not a good thing to be facing a law suit where you live. Second, if you ever want to go back to China for any reason, leaving a whole slew of creditors hanging high and dry is not the way to get that coveted China visa. We have heard through reliable sources that those who “abandon” China will/have become persona non grata and will never be allowed back. Are you really reading to foreclose the opportunity of ever doing business in or with China again?
Not that proper dissolution is cheap or easy, as it typically involves the following:
- Informing all creditors of the closing
- Resolving all pending transactions
- Settling all outstanding taxes.
- Liquidating company property
- Officially de-registering the company with the government
If company assets are insufficient to pay the company’s outstanding debt, it should file for bankruptcy.
Source: Harris & Moure, pllc
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Procedures for Arbitration in China
March 18, 2009
After exchanging documents and appointing arbitrators, the CIETAC will fix a hearing date. In some cases, the parties may elect to conduct the proceedings on a documents-only basis and dispense with the oral hearing. It can be done subject to the agreement of both parties and the tribunal. Documents-only arbitration is suitable for cases where there is no substantial dispute on matters of facts.
The three arbitrators will make an award after the hearing. If the arbitrators cannot reach a unanimous decision, it will be decided by simple majority. The Arbitration Rules provide that the tribunal shall render an award within six months after the tribunal is formed, although this time limit can be extended by the CIETAC. Delays are not unusual in practice, bearing in mind the fact that the three arbitrators involved may reside in different jurisdictions, and the award must be reviewed and approved by the CIETAC before it is issued. The award comes into legal effect the date on which it is made. If no time limit is specified in the award, the parties must automatically take it into effect; otherwise, they must execute the award within the time limit specified.
The tribunal has the power to decide in the award the arbitration fees and expenses to be paid by the parties to the CIETAC as well as any compensation for expenses occurred to be paid to the winning party.
If any claims or counterclaims were omitted from the award, either party has 30 days from the receipt of the arbitral award to request in writing an additional award. If the tribunal finds that such an omittance exists, they have 30 days from the receipt of the request to make an additional award. Similarly, the tribunal can on its own initiative make an additional award within a “reasonable period of time” following the arbitral award.
At any time before the final award is made, a partial award may be made on any issue, provided that it is considered necessary by the tribunal or that the parties request an award and the tribunal accepts. Failure to perform the award will not affect the continuation of proceedings nor prevent the tribunal from making a final award.
The Arbitration Rules also provide for a summary procedure to be followed where either parties with a disputed amount below RMB 500,000 or parties with a disputed amount above RMB 500,000 but who agree, in writing, to a summary procedure. Upon accepting the application for the summary procedure, the CIETAC shall issue a Notice of Arbitration. Only one arbitrator, who should be appointed by the parties by agreement within 15 days after receipt of the Notice, will preside over the summary procedure, failing which the Chairman of the CIETAC will appoint an arbitrator for the parties. Either oral hearing or a document-only arbitration may be adopted, as the CIETAC deems fit.
The time limits for filing of documents and publication of award under the summary procedures are shorter than those under normal procedures. The Respondent should file the defence and counterclaim within 20 days after the receipt of the Notice of Arbitration. The award shall be given within three months from the date that the tribunal was formed.
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