China WFOE Maintenance and Compliance Guide (15) – Dissolving and Liquidating Wholly Foreign Owned Enterprises

The procedures for closing a wholly foreign-owned enterprise its dissolution and liquidation are no easier or shorter than the process of setting up such a company, and normally take between six to nine months to complete.

According to Chinese law, a WFOE must be dissolved if any of the following circumstances apply:

(1) Its term of operation expires
(2) The board of shareholders has adopted a resolution for dissolution to dissolve the company
(3) It is merged or divided
(4) Its business license is revoked by law, or the company is ordered to terminate or cancel it
(5) Where there are serious operational difficulties and its continuance will cause significant losses to shareholders interests, and if these are not able to be resolved, shareholders representing 10 percent or more of the voting rights of all shareholders may request dissolution by the People’s Court
(6) Other reasons for dissolution stipulated in the original Articles of Association have occurred

Upon the declaration of dissolution, the company is required to start the liquidation procedures.

1. Creation of Liquidation Committee

A liquidation committee is composed of its shareholders to handle the liquidation within 15 days from the dissolution date of the company. The liquidation committee shall liquidate and value the company’s assets in accordance with Chinese law and the articles of association.

During the course of liquidation, the company shall not conduct any business activities irrelevant to the liquidation.

The liquidation team shall have the right to handle the company’s ongoing businesses which are related to liquidation ?to terminate employment contracts, to sell, export, transfer, assign or otherwise dispose of any and all assets belonging to the company whether they be inside or outside China, as well as to conclude all business matters of the company.

The liquidation committee shall exercise the following functions and powers during liquidation:

(1) Liquidate the assets of the company, prepare a balance sheet and list of assets, and formulate the liquidation plan
(2) Make an announcement for the benefit of unknown creditors and notify known creditors in writing
(3) Complete any unfinished business of the company
(4) Pay all outstanding taxes
(5) Settle all of the company’s claims and debts
(6) Dispose of the remaining assets after the company’s debts have been settled
(7) Represent the company in any civil litigation
(8) Produce the liquidation report and submit to the board of shareholders and the authorities for approval

2. Liquidation Audits

Liquidation audits are generally required twice in the process:

(1) When the termination application is submitted to the authorities and the application is approved by those authorities
(2) When all termination procedures have been completed

As well as normal audit procedures, liquidation audits focus on these additional issues:

(1) The financial performance of the company for the six months before the date of declaring liquidation

(2) The completeness and truth of information on assets, such as:
(a) Whether the calculation of accounts receivable is correct
(b) Whether the bad debts write-off was properly authorized
(c) Whether the bank account records are complete
(d) Whether physical assets properly belong to the company
(e) Whether disposal/loss of fixed assets is approved by related authorities
(f) Whether invested assets are recorded and distributed correctly

(3) The liabilities of the company, such as:

(a) Whether salaries and welfare payable are calculated correctly
(b) Whether tax payable has been cleared properly
(c) Whether other liabilities have been cleared properly

(4) The liquidation expenses, including a check on whether these expenses were spent in compliance with the law

3. Liquidation Deadlines

The liquidation team shall observe the following deadlines:

(1) Within seven days of beginning the liquidation, the relevant authorities must be notified
(2) Within 15 days of beginning the liquidation, the liquidation team must be established
(3) Within 10 days of establishing the liquidation team, it must notify known creditors and ask them to declare their claims
(4) Within 60 days of establishing the liquidation team, it shall make at least one public announcement in a national or provincial newspaper.
(5) Within 30 days of submitting the liquidation report, liquidation team should perform the deregistration procedures with original registration authority.

4. Distribution of Liquidated Proceeds

In accordance Chinese law, revenues from the sale or disposal of the liquidated assets shall be paid out in the following order:

(1) Liquidation expenses, including expenses for management, sales and distribution; expenses for public announcements, lawsuit and arbitration; remuneration to members of and advisors to the liquidation team; and other expenses occurred during the liquidation
(2) Wages and mandatory welfare payments for employees
(3) Outstanding taxes
(4) Outstanding secured debts
(5) Other outstanding debts

After payments have been made in accordance with provisions above and upon completion of the liquidation procedures, the remaining revenue shall be converted into U.S. dollars, or any other foreign currency acceptable to the investor through a designated foreign exchange bank or any other method permitted by law, and can be freely remitted or transported abroad.

5. Cancellation of Registration

Once the liquidation procedures are completed, the liquidation team needs to submit a liquidation report, approved by the board of shareholders, to the original approval authority. The team should return its business license and cancel its registration with the relevant government authorities including the Ministry of Commerce, State Administration of Industry and Commerce (SAIC), the customs administration, the tax authorities and State Administration of Foreign Exchange (SAFE). All the company’s bank accounts shall be closed.

The investor shall have the right to preserve the originals of all accounting records and business documents of the company.

Within 30 days from submission of the liquidation report, the company should perform deregistration with the authorities, and after deregistration, the company can repatriate the remaining funds back to the investor. These deregistration procedures and other processes include:

(1) Deregistration from Ministry of Commerce, and cancellation of the Approval Certificate
(2) Tax audit and deregistration from local tax bureau
(3) Tax audit and deregistration from state tax bureau
(4) Customs deregistration
(5) Deregistration with SAFE
(6) Deregistration from SAIC
(7) Deregistration of Business Code Certificate
(8) Public announcement in a newspaper to terminate the business remit funds back to investors close bank accounts

In addition, some companies in particular sectors may have other specialized registrations and those should be closed off as well. Although not strictly a financial issue, foreign investors should also ensure that, for example, unused raw materials and unsold products are disposed of properly in an environmentally sensitive way, and that buildings and other major assets are dealt with properly.