Dissolution & Liquidation of Foreign Investment Enterprises
The Foreign Investment Enterprise herein refers to CHINESE-FOREIGN EQUITY JOINT VENTURES, CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES and WHOLLY OWNED FOREIGN ENTERPRISE.
I Application of the Law
In the former, the dissolution & liquidation of FIEs applies to the MEASURES FOR LIQUIDATION OF FOREIGN INVESTMENT ENTERPRISES promulgated as of 1996. Whereas, the measures had been cancelled by Regarding the decision of abolishing parts of administrative regulations by State Council, and now the Corporation Law of PRC prevails.
In accordance with of new corporation law, the limited liability companies and joint stock limited companies invested by foreign investors shall be governed by the present Law. Where there are otherwise different provisions in any law regarding foreign investment, such provisions shall prevail.
According to the principle of special law has priority to common law, the laws of CHINESE-FOREIGN EQUITY JOINT VENTURES, CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES and WHOLLY OWNED FOREIGN ENTERPRISE shall be applied first upon the issues of dissolution & liquidation of FIEs.
I I Reasons of Dissolution
As for the reasons are specified in Article 90 of the implementation regulations of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, article 48 of implementation regulations of the law of Chinese-foreign contractual joint ventures and article 72 of implementation regulations of the law of wholly owned foreign enterprise. The specific circumstances are as follows:
1. maturity of business term;
2. occurrence of serious loss and no ability to operate continuously;
3. one party failed in performing obligation prescribed in agreement, contract or article of association, therefore causing no ability to operate continuously
4. one party of Equity Joint Ventures failed in achieving its goal of business, meanwhile lacking development future.
5. suffered by Force Majeure such as act of god, war etc, causing no ability to operate continuously
6. enterprises are ordered to close due to violating the law and administrative regulation;
7. occurrence of the reasons of dissolution & liquidation specified in contract or article of association;
8. ordered to dissolute because of court decision or arbitration award.
Otherwise except provisions mentioned above, new corporation law specifies other reasons of dissolution:
* The shareholders’ meeting or the shareholders’ assembly decides to dissolve it;
* It is necessary to be dissolved due to merger or split-up of the company;
* Where a company meets any serious difficulty during its operation or management so that the interests of the shareholders will be subject to heavy loss if it continues to exist and it cannot be solved by any other means, the shareholders who hold ten percent or more of the voting rights of all the shareholders of the company may plead the people’s court to dissolve the company.
III Liquidation
i Common Liquidation
For CHINESE-FOREIGN EQUITY JOINT VENTURES, where meeting the requirements of (ii), (iv), (v), (vii) mentioned above, the board of director shall bring forward the dissolution application and submit it to approval authority for approval.
For CHINESE-FOREIGN CONTRACTUAL JOINT VENTURES, where meeting the requirements of (ii), (v) mentioned above, the board of director or Joint Management Committee shall bring forward the dissolution application and submit it to approval authority for approval..
For WHOLLY OWNED FOREIGN ENTERPRISE, where meeting the requirements of (ii), (iv) mentioned above, the management institution shall bring forward the dissolution application and submit it to approval authority for approval.
ii Special Liquidation
Where failed in organizing the liquidation committee by enterprise themselves, the authority institution, creditors or investor shall apply for special liquidation through submitting to approval authority or arbitration committee or court.
If submitting the case to court for dissolution, the People’s court only made actions upon the matters concerning validity of joint venture contract, breaching responsibility and whether to terminate the contract or not, have no legal basis to decide the liquidation process.
iii Composition of Liquidation Committee
According to the implementation regulations of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Ventures, the member of liquidation committee shall be designated among the members of the board of directors; where directors failed or was not applicable to assume the member of liquidation committee, enterprise may employ the accountants or lawyers who registered in China to conduct liquidation function, if necessary, the approval authority may designate somebody to supervise the process.
According to the implementation regulations of the law of wholly owned foreign enterprise, the liquidation committee shall be comprised by the legal representative, representative of creditors or representative of competent authority, and employ the accountants or lawyers who registered in China to conduct liquidation process.
IV How to Specify Precaution Provisions to Avoid Deadlock of Operation
i The Designation of General Manager, Vice Manager
According to article of association, the general manager shall be designated by foreign investor and the vice manager shall be designated by Chinese party. To prevent the candidate of general manager or vice manager was constantly rejected by other party, therefore causing deadlock and impact on normal operation, article of association or joint venture contract shall be specified that one party can only veto two times for tow different candidates designated by another party and the third candidate can not be vetoed.
ii As for Enlarging Investment
If it is necessary to increase investment in order to enlarge scale or to improve economic benefits, the article of association can specify that if one party is unable to increase investing capital , he may not be against the other party to increase investment. Meanwhile, the investment proportion shall be adjusted in accordance with the increasing amount.
iii FIEs May Take Full Use of Arbitration Provisions Agreed by Both Parties to Solve the Deadlock of Operation
V The Flow Chart of Liquidation of FIEs
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By Vincent Sun
Attorney at Law
Allen & John Law Firm May 20, 2008
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