New trend in compulsory liquidation procedures

With the transformation and upgrading of industry in China, and progress in supply-side reforms, Chinese legislation concerning the scope of entities with liquidation obligations, and the liability bearable by parties with liquidation obligations, is showing a gradual trend towards broadening and severity, the hope being that this will drive the large number of “zombie companies” in operational difficulty out of the market. Additionally, there are numerous foreign-invested enterprises that have been unable to successfully achieve a transformation, and that are also hoping they can quickly complete liquidation and de-registration procedures and remit the remaining capital back to the investing country. However, in practice, there are many “zombie companies” whose official seals, licences and certificates, financial accounts and/or main personnel are missing for various reasons, and under such circumstances voluntary or compulsory liquidation faces numerous obstacles.

In two compulsory liquidation cases in which the authors were recently involved, the People’s Courts of Haidian and Changping districts in Beijing each rendered civil rulings determining the liquidation committee shall apply for de-registration of the company, while the compulsory liquidation procedure had to be terminated. These rulings enabled our clients to cancel the enterprises invested in China and remit large amounts of remaining capital to the investing countries according to law. The rulings in both cases clarify that when substantive obstacles make the completion of a compulsory liquidation procedure impossible, de-registration should nonetheless be carried out, which is of groundbreaking significance in the judicial practice of courts in the Beijing region, and even courts around the country.

Common difficulties encountered in the compulsory liquidation of companies. Based on the current legal regime in China, liquidation procedures are divided into voluntary liquidation and compulsory liquidation procedures. The term “voluntary liquidation” means a liquidation procedure initiated by a company itself after grounds for dissolution arise, whereas the term “compulsory liquidation” means a liquidation procedure initiated by a people’s court after institution of a legal action by a creditor or shareholder.

When the whereabouts of the company’s official seal, licences and certificates, financial accounts and/or main personnel are unknown, a voluntary liquidation procedure is difficult to initiate because the company cannot carry out the procedures for recordal of the liquidation committee, or carry out company financial and tax audits, making the initiation of a compulsory liquidation procedure the only potential option. However, article 28 of the Minutes of the Work Conference on the Trial of Compulsory Company Liquidation Cases specifies that under such a circumstance the compulsory liquidation procedure should be terminated on the grounds that the liquidation is unable to proceed.

Based on publicly available cases, the vast majority of courts around the country fail to express any opinion in their rulings terminating a compulsory liquidation procedure on whether the company is subsequently to be de-registered. Under such a circumstance, the company liquidation committee designated by the court remains unable to submit company liquidation materials that comply with the requirements of the Administrative Regulations for Enterprise Registration, also making it impossible for the administration for industry and commerce to carry out the de-registration of the company in accordance with the regulations.