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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