Graceful Withdrawal

Practice Guidelines for Bankruptcy Liquidation of Foreign-funded Enterprises

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Abstract

In July 1992, the Shenzhen Intermediate People's Court accepted the first case about bankruptcy of a foreign-funded enterprise in China, namely, the case under which the Shenzhen Youyi Textile Firm applied for the declaration of bankruptcy of Fuyou Plastics Co., Ltd. (a Chinese-foreign joint venture). Since this case, the number of cases about bankruptcy of foreign-funded enterprises has been increasing. Foreign-funded enterprises and shareholders thereof have attached increasingly greater importance to bankruptcy liquidation as a method of withdrawal from the market of foreign-funded enterprises trapped in business difficulties. For this issue of Focus, LexisNexis has invited senior experts in the bankruptcy field, who have prepared the "Practice Guidelines" for Bankruptcy Liquidation of Foreign-funded Enterprises in combination with their practical experience in cases about bankruptcy liquidation of foreign-funded enterprises.

In July 1992, the Shenzhen Intermediate People's Court accepted the first case about the bankruptcy of a foreign-funded enterprise in China, namely, the case under which the Shenzhen Youyi Textile Firm applied for the declaration of bankruptcy of Fuyou Plastics Co., Ltd. (a Chinese-foreign joint venture). Since this case, the number of cases about bankruptcy of foreign-funded enterprises has been increasing. Foreign-funded enterprises and shareholders thereof have attached increasingly greater importance to bankruptcy liquidation as a method of withdrawal from market of foreign-funded enterprises trapped in business difficulties. We have prepared the Practice Guidelines for Bankruptcy Liquidation of Foreign-funded Enterprises (the "Practice Guidelines") in combination with our practical experience in cases about bankruptcy liquidation of foreign-funded enterprises.


I. What foreign-funded enterprises can be subject to bankruptcy liquidation?

In accordance with the Enterprise Bankruptcy Law of the People's Republic of China (the "Bankruptcy Law"), only enterprises with legal personality can be subject to bankruptcy liquidation. A foreign-funded enterprise established according to Chinese laws can be subject to bankruptcy liquidation if it has a corporate legal personality.


1. What are types of foreign-funded enterprises?

At present, foreign-funded enterprises in China mainly include five types below:

Type

Definition

Applicable basic law or regulations

Whether they have corporate legal personality

Sino-foreign equity joint ventures

Enterprises established by and with profits shared and risks undertaken by foreign companies, enterprises and other economic organizations or individuals together with Chinese companies, enterprises or other economic organizations within the territory of China, as per percentages set out in relevant contracts

Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures

Yes

Sino-foreign cooperative joint ventures

Enterprises invested in or with establishment conditions provided, and with profits allocated and risks undertaken by foreign enterprises and other economic organizations or individuals together with Chinese enterprises or other economic organizations according to cooperative contracts within the territory of China

Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures

If meeting provisions for conditions for legal person under Chinese laws, such an enterprise will have corporate legal personality; otherwise, it will not have corporate legal personality

Wholly foreign-owned enterprises [1]

Enterprises wholly invested in by foreign investors and established within the territory of China as per Chinese laws, excluding branches of foreign enterprises and other economic organizations within the territory of China

Law of the People's Republic of China on Wholly Foreign-owned Enterprises

If meeting provisions for conditions for legal person under Chinese laws, such an enterprise will have corporate legal personality; otherwise, it will not have corporate legal personality

Foreign-invested companies limited by shares

Corporate legal persons with all the capital composed of equal shares, shareholders responsible for the company concerned to the extent of shares they have subscribed, the company concerned responsible for its debts to the extent of all of its debts, Chinese and foreign shareholders jointly holding the shares and the shares purchased and held by foreign shareholders accounting for 25% of registered capital

Interim Provisions concerning the Establishment of Foreign-invested Companies Limited by Shares

Yes

Foreign-invested partnership enterprises

Partnership enterprises established by two or more foreign enterprises or individuals within the territory of China, and partnership enterprises established by foreign enterprises or individuals with Chinese natural persons, legal persons and other organizations within the territory of China

Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals

No

 

2. What foreign-funded enterprises can be subject to bankruptcy liquidation?           

Enterprises, among the aforesaid five types of foreign-funded enterprises, which can be subject to bankruptcy liquidation, include:   

(1) Sino-foreign equity joint ventures; (2) Sino-foreign cooperative joint ventures with legal personality; (3) wholly foreign-owned enterprises with legal personality; and (4) foreign-invested companies limited by shares.           

According to our practical experience, wholly foreign-owned enterprises are generally registered as companies with limited liability. In that light, a majority of wholly foreign-owned enterprises have legal personality and can be subject to bankruptcy liquidation.      
Enterprises, among the aforesaid five types of foreign-funded enterprises, which cannot be subject to bankruptcy liquidation, include:        

(1) Sino-foreign cooperative joint ventures without legal personality; (2) wholly foreign-owned enterprises without legal personality; and (3) Foreign-invested partnership enterprises.


3. Provisions of local courts on the subject qualification for bankruptcy of foreign-funded enterprises

Some local courts have further defined the subject qualification for bankruptcy of foreign-funded enterprises under their guidelines for trial of bankruptcy cases. For example:   

(1) The Guidelines for Trial of Bankruptcy Cases (Revised Version) issued by the Civil Trial Chamber II of the Higher People's Court of Jiangsu Province on November 17, 2017 provide "Sino-foreign equity joint ventures, Sino-foreign cooperative enterprises and wholly foreign-owned enterprises are enterprises established according to domestic laws. In particular, Sino-foreign equity joint ventures and wholly foreign-owned enterprises are corporate legal persons. A majority of Sino-foreign cooperative enterprises are corporate legal persons, and some of them do not have legal personality. The Sino-foreign equity joint ventures, Sino-foreign cooperative enterprises and wholly foreign-owned enterprises, which are corporate legal persons, have the capacity of bankruptcy."        

(2) The Guidelines for Standardizing Bankruptcy Trial of the Shanghai High People's Court (for Trial Implementation) issued by the Civil Trial Chamber II of the Shanghai High People's Court on August 31, 2018 provide "Sino-foreign equity joint ventures, Sino-foreign cooperative enterprises and wholly foreign-owned enterprises are enterprises established according to domestic laws. Sino-foreign equity joint ventures and wholly foreign-owned enterprises are corporate legal persons and have the capacity of bankruptcy. Sino-foreign cooperative enterprises, which are corporate legal persons, have the capacity of bankruptcy."


II. Under what circumstances can foreign-funded enterprises be subject to bankruptcy liquidation?           

If a foreign-funded enterprise has legal personality and falls into any of the following two circumstances, it can be subject to bankruptcy liquidation if:         

(1) it cannot pay off any mature debt and its assets are insufficient for paying off all of its debts; or         
(2) it cannot pay off any mature debt and obviously lacks solvency.


In particular, a foreign-funded enterprise, which "cannot pay off any mature debt", needs to meet the following three conditions:        

(1) the debtor-creditor relationship is established according to the law;       
(2) debt performance period has expired; and           
(3) the debt has not been paid off fully.        

If the balance sheet, auditors' report or asset appraisal report, etc. of a foreign-funded enterprise indicates that all of its assets are insufficient for paying off all of its debts, the said enterprise falls into the circumstance that "its assets are insufficient for paying off all of its debts", unless any contrary evidence sufficiently provides that the assets of the foreign-funded enterprise can pay off all of its liabilities.


If the book assets of a foreign-funded enterprise are more than liabilities but the enterprise falls into any of the following five circumstances, the enterprise "obviously lacks solvency":

(1) it cannot pay off its debts due to seriously insufficient capital or unrealizable properties or any other reason;           
(2) its legal representative is missing, no any other person is responsible for managing properties, and it cannot pay off debts; 
(3) it cannot pay off debts after the compulsory execution of the People's Court;   
(4) it has recorded losses for a long time and has a difficulty in stopping losses, and cannot pay off debts; or           
(5) any other circumstance leading to the foreign-funded enterprise losing solvency.         

III. Who can apply for bankruptcy liquidation of a foreign-funded enterprise?          

If a foreign-funded enterprise has legal personality, and falls into circumstances whereby it applies for bankruptcy liquidation, a specific subject (i.e. applicant) will need to apply for bankruptcy liquidation to a court with jurisdiction.        


1. Types of applicants          

Subjects that can apply for bankruptcy liquidation of foreign-funded enterprises are classified into three types:           

(1) foreign-funded enterprises themselves;    
(2) creditors of foreign-funded enterprises; and        
(3) liquidators of foreign-funded enterprises, which refer to subjects responsible for the liquidation of foreign-funded enterprises, including the liquidation group already established by such enterprises in the circumstances of non-bankruptcy liquidation (i.e. independent liquidation and compulsory liquidation) as well as the subjects with liquidation obligation for the foreign-funded enterprises (all shareholders of companies with limited liability, as well as directors and controlling shareholders of joint-stock companies).         


2. Special requirements for creditors acting as applicants          

Creditors are classified into ordinary creditors and special creditors. Ordinary creditors are mainly contract counterparts with purchase-sale, debit-credit and cooperative relationships with foreign-funded enterprises. Special creditors include employees of foreign-funded enterprises and government departments including tax bureaus, social security bureaus and financial regulatory authorities.

Some local courts have further defined the scope of and requirements for special creditors under their guidelines for trial of bankruptcy cases. Take Beijing Municipality and Shanghai Municipality for example. Creditors that can apply for bankruptcy liquidation of foreign-funded enterprises include:

Region

Type of special creditor

Subject qualification requirement

Beijing Municipality

Employees

Where employees act as applicants, they shall be approved by the employee representative congress or more than two thirds of all the staff, and creditor's rights of employees for foreign-funded enterprises shall be salaries, medical treatment expenses, disability benefits and pensions owed by foreign-funded enterprises for employees, basic pension insurance premiums and basic medical insurance premiums which are owed by foreign-funded enterprises and should be transferred into individual accounts of employees, as well as compensations which should be paid to employees as provided under laws and administrative regulations.

Tax authorities and administrative departments of social insurance premiums

Taxes owed by foreign-funded enterprises, and social insurance premiums that the enterprises should pay (excluding late fees and fines)

Shanghai Municipality

Employees

Labor claims such as employee salaries owed by foreign-funded enterprises

Tax departments and social security departments

Taxes and social insurance premiums owed by foreign-funded enterprises

Financial supervision and administration authorities under the State Council

Make applications for bankruptcy liquidation of financial institutions

In our opinion, if the creditor of a foreign-funded enterprise intends to apply for bankruptcy liquidation of the said enterprise, the said creditor shall refer to the guidelines for trial of bankruptcy cases of the court at the place where the enterprise is located, or consult a bankruptcy lawyer or local court, in order to confirm whether the creditor has the qualification for acting as applicant or not.


IV. Who can determine the application for bankruptcy liquidation by a foreign-funded enterprise itself?

Where a foreign-funded enterprise applies for bankruptcy liquidation by itself, its internal competent organization will, before the application for bankruptcy liquidation, need to make a decision whether to agree about the application for bankruptcy liquidation by the enterprise itself. Owing to different types of foreign-funded enterprises, internal competent organizations thereof vary.

1. Internal competent organizations of foreign-funded enterprises of all types

Type

Internal competent organization

Document agreement about the application for bankruptcy liquidation

Sino-foreign equity joint ventures

Board of directors

Resolution of the board of directors

Sino-foreign cooperative joint ventures with legal personality

Board of directors

Resolution of the board of directors

Wholly foreign-owned enterprise with legal personality

If a wholly foreign-owned enterprise with legal personality is a company with limited liability and one shareholder only, the competent organization is the shareholder

Decision of shareholder

If a wholly foreign-owned enterprise with legal personality is a company with limited liability and more than two shareholders only, the competent organization is the board of shareholders

Resolution of the board of shareholders

Foreign-invested companies limited by shares

General meeting

Resolution of the general meeting

It is worth noting that the competent organizations set out in the aforesaid table only apply to the situation that there are no special provisions on the examination and approval organization for bankruptcy application matters under the articles of association. With respect to a specific foreign-funded enterprise, its competent organization should be determined in combination with its articles of association.          


2. Influence of the Foreign Investment Law on changes in competent organizations   

The Foreign Investment Law of the People's Republic of China (the "Foreign Investment Law"), which was adopted at the Second Session of the 13th National People's Congress on March 15, 2019, will come into effect as of January 1, 2020. Pursuant to the Foreign Investment Law, the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures (the "Three Laws about Foreign Investment") will be abolished as of January 1, 2020. Then, the organizational form, organizational structure and activity standards of the foreign-funded enterprises will be subject to the Company Law of the People's Republic of China (the "Company Law"), the Partnership Enterprise Law of the People's Republic of China and other laws. The Foreign Investment Law provides a five-year transitional period. The foreign-funded enterprises established in accordance with the Three Laws about Foreign Investment can continuously maintain original organization form thereof in the said transitional period.
The organization form of the Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures with legal personality, among the foreign-funded enterprises which can be subject to bankruptcy liquidation, is a company with limited liability. The organ of power of such two types of enterprises is the board of directors, while the organ of power of companies with limited liability is the board of shareholders as provided under the Company Law, showing an obvious conflict. According to the aforesaid Foreign Investment Law, these two types of enterprises can still have the application for bankruptcy liquidation resolved by the board of directors thereof before the implementation and within the five-year transitional period after the implementation of the Foreign Investment Law. However, upon the expiration of the five-year transitional period, the application for bankruptcy liquidation thereof shall be resolved by the board of shareholders pursuant to the Company Law.           

V. Does the application for bankruptcy liquidation by a foreign-funded enterprise need to be approved by a commercial department?        

Among the Three Laws about Foreign Investment and the implementing regulations or implementing rules thereof, only the Implementing Rules for the Law on Wholly Foreign-owned Enterprises clearly provide the bankruptcy of wholly foreign-owned enterprises. As per Article 70 of the Implementing Rules for the Law on Wholly Foreign-owned Enterprises, in a circumstance for bankruptcy, a wholly foreign-owned enterprise shall be dissolved and submit the application for dissolution by itself to the examination and approval authority for approval. The date when the examination and approval authority approves the application is the date of dissolution of the enterprise. According to prevailing laws and regulations on bankruptcy of foreign-funded enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures do not need to be approved by a commercial department before making an application for bankruptcy liquidation, while bankruptcy liquidation of wholly foreign-owned enterprises needs to be approved by a commercial department.           

However, in judicial practices, there are different judgment views whether wholly foreign-owned enterprises need to be approved by a commercial department before making an application for bankruptcy liquidation. Regarding the issue whether a foreign-funded enterprise, applying for bankruptcy to a court as debtor, needs to submit the approval document for bankruptcy of the competent department for foreign-funded enterprises, it is believed under the Answers to Several Questions about Trial of Cases about Bankruptcy of Corporate Legal Persons issued by the Shanghai High People's Court on June 23, 2006 that the bankruptcy of enterprises is not a matter to be examined and approved by the competent department for foreign-funded enterprises according to the law. Therefore, a foreign-funded enterprise, applying for bankruptcy to a court as debtor, does not need to submit the approval document for bankruptcy of the competent department for foreign-funded enterprises. As per the aforesaid answers of the Shanghai High People's Court, all foreign-funded enterprises, including wholly foreign-owned enterprises, do not need to be approved by a commercial department before making an application for bankruptcy liquidation. Under the case about application for bankruptcy liquidation of Taiyang Science and Technology Industry (Huizhou) Co., Ltd. [(2017) Yue 13 Po Shen No.2], the applicant Taiyang Science and Technology Industry (Huizhou) Co., Ltd. is a wholly foreign-owned enterprise, and the Hui Zhou Intermediate People's Court of Guangdong Province, based on Article 70 of the Implementing Rules for the Law on Wholly Foreign-owned Enterprises, deemed that the said company should report to the examination and approval authority for approval before making an application for bankruptcy. 

In view of different judgment views of local courts, we suggest that a wholly foreign-owned enterprise, before applying for bankruptcy liquidation, should communicate with local commercial department and court to determine whether it can only apply for bankruptcy liquidation after approval by the commercial department.           

VI. What court should an application for bankruptcy liquidation be made to?

According to provisions on jurisdiction for bankruptcy cases under the Bankruptcy Law, the application for bankruptcy liquidation of foreign-funded enterprise made by an applicant shall be within the jurisdiction of a court at the place of domicile of the foreign-funded enterprise. However, with respect to a specific application for bankruptcy liquidation under judicial practices, the specific court accepting an application for bankruptcy liquidation of foreign-funded enterprise can be determined in combination with provisions on territorial jurisdiction and level jurisdiction under the Civil Procedure Law, the Judicial Interpretation on the Bankruptcy Law and the bankruptcy guidelines of the court at the place where an enterprise is located.

1. Territorial jurisdiction    

The application for bankruptcy liquidation of a foreign-funded enterprise shall be within the jurisdiction of a court at the place of domicile of the said enterprise. The place of domicile refers to the place where the main office of the said foreign-funded enterprise is located. If it is difficult to affirm the place of location of the main office, the bankruptcy application will be within the jurisdiction of the court at the place of registration of the said foreign-funded enterprise.

It is worth noting that: the court at the place of registration of a foreign-funded enterprise is not inevitably the court with the jurisdiction for the application for bankruptcy liquidation of the said foreign-funded enterprise; only when the place of registration of the foreign-funded enterprise and the place of location of its main office are the same, the court at the place of registration of the foreign-funded enterprise is the court with the jurisdiction for its application for bankruptcy liquidation. If the place of registration of the foreign-funded enterprise and the place of location of its main office are different, the court with the jurisdiction for its application for bankruptcy liquidation is the court at the place of location of its main office.        

2. Level jurisdiction  

Only the court with the jurisdiction for the application for bankruptcy liquidation of a foreign-funded enterprise can be determined as per the abovementioned territorial jurisdiction rules. It is still necessary to determine at which level a court should govern the application for bankruptcy liquidation as per level jurisdiction rules. Take the level of the administrative authority for industry and commerce approving and registering a foreign-funded enterprise as judgment standard. If the said foreign-funded enterprise is approved and registered by the administrative authority for industry and commerce of county, county-level city or district, the application for bankruptcy liquidation will be governed by a primary People's Court; if the said enterprise is approved and registered by the administrative authority for industry and commerce above the region or prefecture-level city (inclusive), the application will be governed by an intermediate People's Court.    

Judicial practices of courts of all places vary in respect of the scope of applications for bankruptcy liquidation within the jurisdiction of intermediate People's Courts. Take Beijing Municipality and Shanghai Municipality for example. Applications for bankruptcy liquidation within the jurisdiction of intermediate People's Courts include:

Region

Type of application for bankruptcy liquidation

Beijing Municipality

Applications for bankruptcy liquidation of enterprises approved and registered by administrative authorities for industry and commerce at or above the city level

Applications for bankruptcy liquidation of enterprises included into the state adjustment plan

Applications for bankruptcy liquidation of financial institutions

Applications for bankruptcy liquidation of listed companies

Applications for transfer of enforcement cases for bankruptcy review

Shanghai Municipality

Applications for bankruptcy liquidation of listed companies

Applications for bankruptcy liquidation of financial institutions

Applications for bankruptcy liquidation of enterprises approved and registered by the State Administration for Industry and Commerce

Applications for bankruptcy liquidation of enterprises approved and registered by the administrations for industry and commerce of cities and with assets totaling CNY400 million or more

Other applications for bankruptcy liquidation which need to be within the jurisdiction of intermediate courts

We suggest that: if an applicant cannot independently determine to which court the applicant should apply for the bankruptcy of foreign-funded enterprise, the applicant should firstly refer to guidelines for trial of bankruptcy cases of the court at the place where the said enterprise is located, or consult a bankruptcy lawyer or local court in order to affirm the court with the jurisdiction for the application for bankruptcy liquidation.           

3. Objection to jurisdiction  

Where a creditor makes an application for bankruptcy liquidation, the court accepting the said application will notify the foreign-funded enterprise. If the foreign-funded enterprise believes that the court accepting the application does not have the jurisdiction, it can raise an objection to jurisdiction to the court within seven days after receiving a notice from the court, and request the court to transfer the application to the court with the jurisdiction.    

VII. What preparations do foreign-funded enterprise need to make before independently applying for bankruptcy liquidation?      

If a foreign-funded enterprise applies for bankruptcy liquidation independently, the internal competent organization of the enterprise will need to make preparations below after making a decision on application for bankruptcy liquidation and before applying for bankruptcy liquidation:

1. Verifying whether shareholders have made contributions      

According to the Bankruptcy Law, if the shareholder of a foreign-funded enterprise has not fully fulfilled contribution obligation after a court accepts the application for bankruptcy liquidation, the bankruptcy manager will be entitled to require the said shareholder to make the contribution subscribed by the shareholder, no matter whether the contribution period of the said shareholder has expired or not. We suggest that before applying for bankruptcy liquidation, a foreign-funded enterprise should verify whether the contribution has been made by the shareholder or not. It can be proved that materials about the contribution made by the shareholder mainly include capital verification report, auditors' report, bank receipt statement and bookkeeping voucher. If it is verified that the contribution has not been made by a shareholder in full, we suggest that the foreign-funded enterprise should communicate with the shareholder about the payment of outstanding contribution as soon as possible, avoiding that the bankruptcy manager prosecutes the shareholder under bankruptcy liquidation procedures for recovering outstanding contribution. 

The non-full contribution of a shareholder does not influence a foreign-funded enterprise applying for bankruptcy liquidation. Even if a shareholder of a foreign-funded enterprise has not fully made contribution, the said enterprise still can submit an application for bankruptcy liquidation to a court. The outstanding contribution of the shareholder will be recovered by the bankruptcy manager from the shareholder under bankruptcy liquidation procedures.   

2. Engaging an accounting firm to issue the auditors' report     

In accordance with the Bankruptcy Law, a foreign-funded enterprise, while applying for bankruptcy liquidation, shall submit relevant financial accounting report to a court. In judicial practices, a foreign-funded enterprise generally needs to submit to the court its auditors' report of the preceding year or the special auditors' report issued for the purpose of application for bankruptcy liquidation. Take Beijing Municipality for example. The auditors' report is one of essential materials for a foreign-funded enterprise applying for bankruptcy liquidation. In the case of no auditors' report, the case filing procedures of the court will be unable to be completed. We suggest that: if a foreign-funded enterprise has never had an auditors' report of the preceding year or the special auditors' report issued for the purpose of application for bankruptcy liquidation, it will need to engage an accounting firm to issue an auditors' report before submitting an application for bankruptcy liquidation.  

3. Completing necessary industrial and commercial changes     

Under bankruptcy liquidation procedures, the legal representative of a foreign-funded enterprise undertakes some specific obligations, including: (1) properly keeping properties, seals, account books, instruments and other materials occupied and managed by him/her; (2) working as per requirements of the People's Court and bankruptcy manager, and answering inquiries faithfully; (3) attending the creditors' meeting and answering inquiries of creditors faithfully; (4) not leaving his/her place of domicile without permission of the People's Court; and, (5) not acting as director, supervisor or senior officer of any other enterprise. 

Among the aforesaid five items, Items 4 and 5, especially the office taking restriction in Item 5, have significant influence on the legal representative. Additionally, if a foreign-funded enterprise is accused due to its failure to repay any mature debt and still fails to pay off the debt as per the effective judgment, the high consumption of its legal representative, in respect of trips, travel, tourism, taking a holiday, children's education, etc., will be probably restricted by the court [2]. With the view of preventing the current legal representative of a foreign-funded enterprise from the aforesaid influence and restriction, we suggest that when necessary, the foreign-funded enterprise may change the legal representative, and get through formalities of registration of change of legal representative with the administrative department for industry and commerce.     

As the bankruptcy manager designated by a court will take over a foreign-funded enterprise after entering into bankruptcy liquidation procedures, the shareholders and business management of a foreign-funded enterprise will lose the control over foreign-funded enterprises. If the shareholders and business management of a foreign-funded enterprise needs to change its legal representative, director, supervisor or senior officer, etc., it is suggested that the change should finish before the application for bankruptcy liquidation.


4. Working out an employee settlement scheme   

In accordance with the Labor Contract Law, where a foreign-funded enterprise is declared by a court as bankrupt, the labor contracts concluded by and between it and employees will be terminated. In this situation, the foreign-funded enterprise will need to pay employees economic compensations. If a foreign-funded enterprise retains some employees at the time of bankruptcy application, it will need to work out an employee settlement scheme. The said scheme should clearly specify the economic compensation standard, settlement methods of salaries, expenses not reimbursed yet and other outstanding monies, transfer formalities of social insurance premiums and housing provident fund and other matters at the time of leaving of employees.


5. Raising expenses necessary for bankruptcy liquidation          

Expenses relating to bankruptcy liquidation of a foreign-funded enterprise generally include legal fees, audit fees, court acceptance fees and bankruptcy application fees, remuneration of bankruptcy manager and asset appraisal expenses. Legal fees are spent for engaging a law firm to prepare application materials of bankruptcy liquidation and submit a bankruptcy application to the court. Audit expenses are spent for engaging an accounting firm to issue auditors' report. Court acceptance fees are generally collected by the case filing chamber after the court receives bankruptcy application materials. Take the Shijingshan District People's Court of Beijing Municipality for example. The case acceptance fees are CNY70. The bankruptcy application fees are calculated by the total amount of bankruptcy assets and are halved by the standard of property case acceptance fees, not exceeding CNY300,000 at most.    

The remuneration of bankruptcy manager is determined within the following percentage scopes as per the total property value of final settlement of a foreign-funded enterprise:    

(1) if the total property value of final settlement does not exceed CNY1 million, below 12%;
(2) for the part from CNY1 million to CNY5 million, below 10%;
(3) for the part from CNY5 million to CNY10 million, below 8%;  
(4) for the part from CNY10 million to CNY50 million, below 6%;
(5) for the part from CNY50 million to CNY100 million, below 3%;          
(6) for the part from CNY100 million to CNY500 million, below 1%; and
(7) for the part exceeding CNY500 million, below 0.5%.    

As per bankruptcy cases handled by us, the bankruptcy manager may collect fees as per workload rather than the aforesaid statutory standards.

Asset appraisal expenses are spent for the asset appraisal at the time of asset realization of a foreign-funded enterprise. In the case of realization of assets such as fixed assets under bankruptcy liquidation procedures, the bankruptcy manager may otherwise engage an asset appraisal company to appraise assets to be realized.

As a foreign-funded enterprise has been insolvent at the time of application for bankruptcy liquidation and cannot pay such expenses, it is necessary for shareholders or related party to pay them in advance. Advances, as bankruptcy expenses, are repaid to advancing persons from bankruptcy properties at any time. We suggest that after a foreign-funded enterprise determines the application for bankruptcy liquidation, the said enterprise, shareholders, related parties and so on should work out the budget for needed bankruptcy liquidation expenses and prepare corresponding capital in advance. If it is necessary for a shareholder to advance expenses and a foreign-funded enterprise has several shareholders, such shareholders shall determine upon negotiation whether all the shareholders undertake such expenses as per shareholding percentages or some shareholders undertake them.  

VIII. What application materials of bankruptcy liquidation are needed to be prepared?      

As the first step of starting bankruptcy liquidation procedures, an applicant needs to submit bankruptcy application form and evidential materials to the court with the jurisdiction as per the Bankruptcy Law and the guidelines for trial of bankruptcy cases by the court at the place where the enterprise is located.  

1. Application materials of bankruptcy liquidation provided under the Bankruptcy Law

Pursuant to the Bankruptcy Law, when applying for bankruptcy liquidation, application materials necessary to be submitted by an applicant including bankruptcy application form and relevant evidences. When independently applying for bankruptcy liquidation, a foreign-funded enterprise also needs to submit explanations on property conditions, the list of debts, the list of creditor's rights, relevant financial accounting reports, employee settlement scheme, and conditions of payment of staff salaries and social insurance premiums.           

2. Special provisions of local courts on application materials of bankruptcy liquidation        

Under judicial practices, some local courts have special provisions on materials needed for the application for bankruptcy liquidation. For example, the Regulations of the Higher People's Court of Beijing Municipality for Trial of Enterprise Bankruptcy Cases provide application materials of bankruptcy liquidation necessary to be submitted to courts in view of enterprises themselves, creditors and liquidation principals of enterprises. 

Take Beijing Municipality for example. Application materials of bankruptcy liquidation necessary to be submitted by all types of applicants are specified as below.

Type of applicant

Application materials of bankruptcy liquidation

Foreign-funded enterprises themselves

 (1) Bankruptcy application form;

 (2) Subject qualification certification, i.e. business license and the industrial and commercial annual inspection materials of the recent year (as the industrial and commercial annual inspection system has been cancelled, some courts require the submission of a full set of industrial and commercial archives);

 (3) Document for agreement about the application for bankruptcy liquidation of the board of shareholders or general meeting and the board of directors;

 (4) List and contact information of legal representative or major principal, and those of directors, supervisors, senior officers and principals of other management departments;

 (5) Explanations on property conditions, including conditions of tangible assets, intangible assets, external investment situation and capital account;

 (6) List of debts, specifying creditor's name, domicile, contact information, the amount of creditor's right, guarantee or not, the formation time of creditor's right and dunning conditions;

 (7) List of creditor's rights, specifying debtor's name, domicile, contact information, debt amount, guarantee or not, the formation time of debt and dunning and repayment conditions;

 (8) Relevant financial accounting report (mainly the auditors' report of the preceding year or the special auditors' report issued for the purpose of bankruptcy liquidation);

 (9) relevant lawsuit, arbitration and execution conditions;

 (10) Employee conditions and settlement plan, specifying the lawful compensation scheme for employees after the cancellation of labor relations; and

 (11) Payment conditions of salaries of employees and senior officers, social insurance premiums and housing provident fund.

Creditors

 (1) Bankruptcy application form;

 (2) Certification on the subject qualification of the creditor and the foreign-funded enterprise;

 (3) Fact of occurrence of creditor's right, the nature and amount of creditor's right, guarantee or not, attached with evidences; and

 (4) Evidence that the foreign-funded enterprise cannot pay off any mature debt.

Liquidation principals

 (1) Bankruptcy application form;

 (2) Certification on the subject qualification of the foreign-funded enterprise;

 (3) Basic conditions of the liquidation principal or document about the establishment of a liquidation group;

 (4) Evidentiary materials about the dissolution of the foreign-funded enterprise;

 (5) In the case of no liquidation of the foreign-funded enterprise, the financial report that assets of the foreign-funded enterprise are insufficient for paying off all the debts;

 (6) In the case of the liquidation of the foreign-funded enterprise, the liquidation report that assets of the foreign-funded enterprise are insufficient for paying off all the debts;

 (7) List of debts, specifying creditor's name, domicile, contact information, the amount of creditor's right, guarantee or not, the formation time of creditor's right and dunning conditions;

 (8) List of creditor's rights, specifying debtor's name, domicile, contact information, debt amount, guarantee or not, the formation time of debt and dunning and repayment conditions;

 (9) relevant lawsuit, arbitration and execution conditions of the foreign-funded enterprise;

 (10) Employee conditions and settlement plan of the foreign-funded enterprise, specifying the lawful employee compensation scheme for employees after the cancellation of labor relations by the foreign-funded enterprise; and

 (11) Payment conditions of salaries of employees and senior officers, social insurance premiums and housing provident fund.

In consideration of different requirements for application materials of bankruptcy liquidation by local courts, we suggest that an applicant should prepare such materials as per requirements of local court before applying for bankruptcy liquidation of a foreign-funded enterprise.

IX. How much time do courts need for accepting applications for bankruptcy liquidation?

In accordance with the Bankruptcy Law, the procedures of application for bankruptcy liquidation of a foreign-funded enterprise and the time for a court accepting an application for bankruptcy liquidation vary for different applicants.

Type of applicant

Application procedure

Time for a court accepting an application for bankruptcy liquidation

Creditors

The court notifies a foreign-funded enterprise within five days as of the date of application for bankruptcy liquidation. If the foreign-funded enterprise objects to the said application, it can raise an objection to the court within seven days as of the date when it receives a notice from the court (objection period)

The court judges whether to accept the application for bankruptcy liquidation within ten days as of the date of expiration of the objection period

Foreign-funded enterprises themselves

Without objection procedures

The court judges whether to accept an application for bankruptcy liquidation within 15 days as of the date when it receives the said application

Liquidation principals

Without objection procedures

The court judges whether to accept an application for bankruptcy liquidation within 15 days as of the date when it receives the said application

If a court needs to extend the time for accepting an application for bankruptcy liquidation in a special situation, it can, upon approval by a court at the next higher level, extend the time for 15 days to judge whether to accept the said application.


If a court judges not to accept an application for bankruptcy liquidation, it will need to serve the applicant written judgment and give reasons within five days as of the date when it makes such judgment. If the applicant does not agree about the judgment, the applicant can institute an appeal to a court at the next higher level within ten days as of the date when the applicant receives the written judgment.   

X. Can an application for bankruptcy liquidation be revoked? 


Pursuant to the Bankruptcy Law, an applicant can revoke an application for bankruptcy liquidation of a foreign-funded enterprise after submitting it and before the time when the court accepts the application. The revocation after the time is not allowed. Therefore, if an applicant decides to revoke an application for bankruptcy liquidation, the applicant shall make an application to the court before the court issues the written judgment of acceptance of the application.


An application for bankruptcy liquidation can be revoked by an applicant, and be rejected by the court. If the court finds upon examination that a foreign-funded enterprise does not meet bankruptcy liquidation conditions before it accepts an application for bankruptcy liquidation of the foreign-funded enterprise and after it declares bankruptcy, it can reject the application. If the applicant does not agree about the judgment, the applicant can institute an appeal to a court at the next higher level within ten days as of the date when the written judgment is served.

XI. How much time do entire bankruptcy liquidation procedures need?         


As the Bankruptcy Law does not provide the conclusion period of bankruptcy liquidation procedures, the trial period in judicial practices is generally long, being one to two years, two to three years and even over five years. Take a case of bankruptcy liquidation of a state-owned enterprise handled by us for example. The state-owned enterprise submitted an application for bankruptcy liquidation at the beginning of August 2017. The court judged to accept the application in the last ten-day period of October 2017 and judged the declaration of bankruptcy in September 2018. At present, the bankruptcy manager is still getting through tax deregistration formalities, but has not got through industrial and commercial deregistration formalities.  


We suggest that a foreign-funded enterprise should reasonably expect the time of bankruptcy liquidation procedures. If it deems that the procedures take a long time, its shareholders and related parties can supplement debt repayment capital for the enterprise by such means as of capital increase, provision of borrowings and so on, cancelling the status of insolvency of the enterprise, and then, the enterprise can be deregistered by independent liquidation.


In order to shorten the trial period of a bankruptcy case, the Supreme People's Court and some local courts are vigorously promoting the mechanism of division of complex and simple bankruptcy cases.          


Under the Meeting Minutes for the Trial of Bankruptcy Cases by Nationwide Courts issued on March 4, 2018, the Supreme People's Court put forward the establishment of the mechanism of division of complex and simple bankruptcy cases so as to accelerate the trial of such cases. The aforesaid mechanism applies to bankruptcy cases with a definite debtor-creditor relationship and clear property conditions of debtors.


Under the Opinions of the Higher People's Court of Beijing Municipality on Accelerating the Trial of Bankruptcy Cases issued by the Higher People's Court of Beijing Municipality in April 2018, it is defined that simple bankruptcy cases with a definite debtor-creditor relationship and clear property conditions of debtor can be subject to rapid trial, and cases about the transfer for bankruptcy review in the condition of no properties upon examination by enforcement department shall be priorly subject to rapid trial. In terms of trial period, the Opinions of the Higher People's Court of Beijing Municipality on Accelerating the Trial of Bankruptcy Cases provide that a bankruptcy case subject to rapid trial shall be generally concluded within six months as of the date when the court judges to accept the application for bankruptcy liquidation; and, bankruptcy cases with no properties or account books or relevant employees missing shall be generally concluded within three months as of the date when the court judges to accept the application for bankruptcy liquidation.      


Along with the continuous promotion of the mechanism of division of complex and simple bankruptcy cases, the trial period of simple bankruptcy cases is expected to be largely shortened. We suggest that if a foreign-funded enterprise conforms to standards of simple bankruptcy cases stipulated by a local court, it can actively communicate with the court about the application of rapid trial procedures.           


As of the time when a court judges to accept a bankruptcy application and designates bankruptcy manager, bankruptcy liquidation procedures are mainly dominated by the bankruptcy manager. We suggest that a foreign-funded enterprise and its legal representative, financial staff, shareholders and so on should keep close contact with the bankruptcy manager, and actively coordinate with the bankruptcy manager, in order to shorten the time needed for bankruptcy liquidation procedures to a certain degree.   

XII. What legal liability may the business management bear under bankruptcy liquidation procedures?


Under bankruptcy liquidation procedures, the business management such as the legal representative, directors, supervisors and senior officers [3] of a foreign-funded enterprise mainly coordinate with the bankruptcy manager about bankruptcy liquidation of the foreign-funded enterprise. If the business management commits any improper act (especially the improper act relating to properties of the foreign-funded enterprise) under bankruptcy liquidation procedures, it may bear legal liability.

 

Type

Liability circumstance

Legal liability

Directors, supervisors and senior officers

Violate loyalty obligation [4] and diligence obligation [5], incurring the bankruptcy of the foreign-funded enterprise

They will bear legal liability according to the law, and shall not act as directors, supervisors or senior officers of any enterprise within three years as of the date of conclusion of bankruptcy liquidation procedures

Legal representative, and financial managers and other business managers who are obligated to attend a creditors' meeting according to a decision of a court

Upon being summoned by a court, refuse to attend the creditors' meeting for no good reason

The court may summon them by warrant, and impose a fine according to the law

Legal representative and other persons directly liable

The foreign-funded enterprise refuses to submit explanations on property conditions, the list of debts, the list of creditor's rights, relevant financial accounting reports, and conditions of payment of staff salaries and social insurance premiums to a court or submits false ones

The court may impose a fine upon persons directly liable according to the law

Legal representative and other persons directly liable

The foreign-funded enterprise refuses to transfer properties, seals, account books, instruments and other materials to bankruptcy manager, or forges or destroys relevant evidential materials of properties, making property conditions unclear

The court may impose a fine upon persons directly liable according to the law

Legal representative and other persons directly liable

Improperly dispose of properties of the foreign-funded enterprise [6], thereby damaging benefits of creditors

Bear compensation liability for creditors

Legal representative and other persons directly liable

Intentionally conduct any behavior relating to properties of the foreign-funded enterprise or show any material fault, leading to the property loss of the foreign-funded enterprise

The bankruptcy manager may file a lawsuit against the legal representative and other persons directly liable on behalf of the foreign-funded enterprise, requiring them to bear corresponding compensation liability

Legal representative, and financial managers and other business managers obligated to coordinate with bankruptcy manager about bankruptcy liquidation as decided by a court

Leave the place of domicile without the permission of the court

The court may admonish and detain them, and impose a fine according to the law


XIII. What legal liability may shareholders bear under bankruptcy liquidation procedures?


Under bankruptcy liquidation procedures, the liability probably borne by shareholders of a foreign-funded enterprise mainly includes the payment of outstanding contribution, the refund of principal and interests of withdrawn capital as well as the joint and several repayment liability of shareholders for corporate debts at the time of impossibility of liquidation of the enterprise.


1. Payment of outstanding contribution


According to the Bankruptcy Law, if the shareholder of a foreign-funded enterprise has not fully fulfilled contribution obligation after a court accepts the application for bankruptcy liquidation, the bankruptcy manager shall require the said shareholder to make the contribution subscribed by the shareholder, not restricted by the contribution period. Therefore, if a shareholder has not fully made contribution to the foreign-funded enterprise after the enterprise enters into bankruptcy liquidation procedures, no matter whether the contribution period has expired or not, the said shareholder will be obligated to make the outstanding contribution. If the shareholder does not actively make the outstanding contribution, the bankruptcy manager will be entitled to file a lawsuit against the said shareholder, requiring the shareholder to fulfill the contribution obligation, and the shareholder shall not refuse that for the reason that the contribution period has not expired yet. Additionally, if a foreign-funded enterprise owes any debt to the shareholder, the shareholder shall not offset the outstanding contribution by the debt.


2. Refund of principal and interests of withdrawn capital


If a shareholder withdraws capital of a foreign-funded enterprise, the bankruptcy manager may file a lawsuit against the said shareholder, requiring the shareholder to refund the principal and interests of the withdrawn capital, and the shareholder shall not defend for the reason that the withdrawal of capital has gone beyond the prescribed period of litigation. Additionally, if a foreign-funded enterprise owes any debt to the shareholder, the shareholder shall not offset the principal and interests of withdrawn capital by the debt.


3. Joint and several repayment liability of shareholders for corporate debts at the time of impossibility of liquidation of the enterprise


According to Article 18 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II), where any delay in the performance of obligations by shareholders of a limited liability company or directors or the controlling shareholder of a joint-stock company results in the loss of the main properties, account books, material documents or other things of the company and in an impossibility of liquidation of the company and any creditor of the company asserts that such shareholders, directors or the controlling shareholder shall be severally and jointly responsible for the debts of the company.


If a foreign-funded enterprise with corporate system cannot be subject to bankruptcy liquidation for the reason of a shareholder thereof, the said shareholder may be required by a creditor to bear joint and several liability for corporate debts. There are relevant cases under judicial practices. For example, under the "Case about Application for Bankruptcy Liquidation of Beijing Langyuehuitai Photoelectric Technology Development Co., Ltd." [(2018) Jing 0115 Po No.3], the bankruptcy manager of Beijing Langyuehuitai Photoelectric Technology Development Co., Ltd. could not contact relevant persons of the company or take over properties, account books, corporate seals and other materials of the company, and therefore, could not liquidate the company. The Daxing District People's Court of Beijing Municipality believed: as the bankruptcy manager could not contact relevant persons of the company or take over properties, account books, corporate seals and other materials of the company, and therefore, could not liquidate the company, the creditors may require shareholders of the company to bear the joint and several liability for corporate debts.

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[1] In our opinion, "enterprises wholly invested in by foreign investors" include enterprises wholly invested in by one foreign investor and those wholly invested in by two or more foreign investors. The former are so-called wholly foreign-owned enterprises in a narrow sense, while the later are foreign joint ventures. As it has become a practice that enterprises established pursuant to the Law of the People's Republic of China on Wholly Foreign-owned Enterprises are called wholly foreign-owned enterprises, the said practice is followed under the Practice Guidelines. However, wholly foreign-owned enterprises set out hereunder should be understood as wholly foreign-owned enterprises in a narrow sense and foreign joint ventures.

[2] Pursuant to the Several Provisions of the Supreme People's Court on Restricting Extravagant Spending and Relevant Spending of Persons Subject to Enforcement, if a person subject to enforcement is an entity, after the measure of restricting spending is taken, the person subject to enforcement and its legal representative, main principal, person directly liable and influencing debt performance and actual controller shall not conduct any of the following behaviors:

(I) when taking any transportation means, selecting airport, the soft sleeper of train or shipping space of Class 2 or above of ship;
(II) conducting extravagant spending at a star hotel, wine shop, nightclub, golf course, etc.;
(III) purchasing any immovable property, or newly building, expanding or decorating at a high level any house;
(IV) leasing any high-grade office building, hotel, apartment or any other place for work;
(V) purchasing any vehicle unnecessary for business;
(VI) travelling or taking a holiday;
(VII) any child studying at an expense private school;
(VIII) purchasing any insurance wealth management product with high premium; or
(IX) taking any seat of G-series high-speed train, any seat of Class 1 or above of any other bullet train or conducting any other consumption unnecessary for life and work.

[3] In accordance with the Company Law, senior officers refer to general manager, deputy general manager and financial principal of a company, the secretary of the board of directors of a listed company and other persons prescribed under the articles of association.

[4] Diligence obligation means that when exercising functions and powers and making decisions, directors, supervisors and senior officers must take benefits of the company as standard, should not be neglectful, careless or materially faulty, and should fulfill their duties in a proper way and with reasonable prudence, skills and care. At present, no law prescribes concrete violations of the diligence obligation. Generally, a judge identifies whether a violation of diligence obligation is constituted in a concrete case.

[5] In accordance with the Company Law, violations of the loyalty obligation include:

(I) embezzling corporate capital;
(II) opening an account to save corporate capital in the name of oneself or any other person;
(III) in violation of the articles of association, borrowing the corporate capital to others or providing guarantee for others by corporate property without agreement of the board of shareholders, general meeting of the board of directors;
(IV) in violation of the articles of association or without the agreement of the board of shareholders or general meeting, concluding a contract or conducting any transaction with the company;
(V) without the agreement of the board of shareholders or general meeting, taking advantage of position to seek any business opportunity, which should belong to the company, for oneself or others, or operating any business similar to that of the company for oneself or others;
(VI) appropriating to oneself the commission for the transaction between others and the company;
(VII) disclosing any corporate secret arbitrarily; and
(VIII) conducting any other behavior in violation of the loyalty obligation.

[6] Behaviors of improperly disposing of properties of foreign-funded enterprise include revocable behaviors of property disposal and ineffective behaviors of property disposal.
Revocable behaviors of property disposal include:

1. The following behaviors relating to properties within one year before a court accepts an application for bankruptcy liquidation: (1) freely transferring any property; (2) trading at an obviously unreasonable price; (3) providing property guarantee for any debt without property guarantee; (4) paying off any immature debt in advance; and (5) waive of creditor's right.

2. Within six months before a court accepts an application for bankruptcy liquidation, in a circumstance that the enterprise cannot pay off any mature debt and its assets are insufficient to pay off all debts or the enterprise obviously lacks solvency, the enterprise still pays off debts of some creditors, unless the repayment benefits properties of the enterprise.
Ineffective behaviors of property disposal mean that the following behaviors relating to corporate properties are ineffective: (1) concealing or transferring any property for the purpose of avoiding debt; and, (2) forging any debt or admitting any unreal debt.