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 is usually 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 serious doubts about their actual resolve or ability to do this, it 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 a 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 into China. 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.
- Paying all debts.
- Properly liquidating the company.
- Officially de-registering the company with the government.
If your company assets are insufficient to pay your company’s outstanding debt, your company should consider filing for bankruptcy.
Our China lawyers are actually working on a matter right now for a good-sized US company that was in China until a few years ago and then left without following all of the proper procedures. The company has retained us to get back into China and we are having to go back and do the various things it should have done when it actually exited. Because this company was actually current on its taxes and debts when it left China, it will be allowed to return. However, it is having to work with (and pay) former employees to get everything done and this is making things much tougher and more expensive than it would have been had all matters been properly handled when the company originally left China.
You have been warned.
What are you seeing out there?