No doubt compliance with the rules and regulations regarding liquidations, whether voluntarily or through bankruptcy, accrues supplementary costs for the enterprise, both financially and otherwise. Consequently, China has recently witnessed an increase in the trend of foreign enterprises, especially smaller companies, to abandon their operations without observing the statutory liquidation process, thereby leaving behind outstanding bank loans, unpaid debts to creditors and employees, and unpaid taxes.
While the financial incentive and ease of exit may be tempting, there are significant potential consequences to consider.
1.First, any favorable reputation that has been established by the company and shareholder will be quickly and permanently extinguished.
2.Second, the shareholders, actual controllers, legal representative, and other members of the board of directors may be held jointly responsible for the abandoned company’s debts and its failure to meet its legal obligations, notwithstanding the limited liability character of the company.
3.Third, the Chinese government has issued a circular declaring the government’s right to prosecute foreign offenders through a cross border pursuit.
4.And fourth, an illegal withdrawal may also result in company members being black listed by the local authorities, which can have the affect of preventing investment in China at any time in the future.
The decision to terminate operations is made by the shareholders and/or board of directors, who then appoint a liquidation committee to handle the procedures related to the dissolution. While shareholders attempt to appoint members to this committee who will represent their interests, the members do have fiduciary duties to act in the best interest of the company and its creditors, with penalties for violation of this duty or any laws, administrative regulations, or the company’s Articles of Association.
Once the committee has been established, it is imperative to immediately take control of the company stamps, licenses, and bank accounts to prevent any further business activity. With control of the company, the committee can then turn to the process of dissolution, including arranging for government approvals, terminating employee contracts, collecting or writing off debts, selling off remaining assets, reimbursing creditors, filing liquidation and audit reports, and de-registration procedures.
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