(Applicable to Wholly Foreign Owned Enterprise, Sino-Foreign Equity Joint Venture and Cooperative Joint Venture and other types of foreign invested enterprises)
Conditions for Termination
In line with Chinese law, a foreign-funded enterprise shall be terminated where any of the following conditions occurs:
1. That the term of operation expires;
2. That the investors have decided to dissolve the enterprise because of poor operation and serious losses;
3. That the enterprise cannot continue to operate because one of the partners has failed to fulfil its obligations defined by the contract and charter of incorporation;
4. That the enterprise cannot continue to operate because of serious losses resulting from factors of force majeure such as natural disasters and war;
5. That the enterprise has become insolvent;
6. That the enterprise has been dissolved for violation of law or harming public interests;
7. That there have occurred other reasons to dissolve the enterprise as defined by the contract and charter of incorporation.
Procedures for Termination
Where there has occurred any of the conditions to dissolve a foreign-funded enterprise, the board of directors of the enterprise shall file an application and submit it to the reviewing and approving authorities. The date of approving the application shall be date of terminating the enterprise. Within a period of 15 days counted from the date of termination, the enterprise shall make a public announcement and notify all of its creditors that the enterprise has entered the period of liquidating its assets.
Within a period of 15 days counted from the date of making the public announcement, the enterprise shall produce a procedure and principles for the liquidation of assets and nominate candidates for the liquidation panel before submitting them to the reviewing and approving authorities for approval. Only when they are approved by the reviewing and approving authorities can the process of liquidation start. The liquidation panel shall comprise representatives of the board of directors, creditors and competent authorities in charge of the enterprise. The liquidation panel shall be in charge of the whole liquidation work and report to the board of directors. The liquidation panel is under the obligations to check the assets, creditor’s rights and debts of the enterprise on an overall basis, work out a statement of assets and liabilities and catalogue of properties, propose the bases for assets evaluation and computation, and work out the scheme for liquidation, which shall be implemented after adoption by the conference of the board of directors.
Foreign-funded enterprises shall be liable for their debts with all their assets. The remaining assets after the payment for debts shall be shared among the original investors in line with relevant provisions of the contract and charter of incorporation. The value added of the net assets and residual properties of the enterprise in excess of its registered capital shall be viewed as profits and shall be subject to the levy of income tax payable in line with law.
After the end of the liquidation of assets, the liquidation panel shall present a liquidation report. After adoption by the conference of the board of directors, the liquidation report shall be submitted to the reviewing and approving authorities for approval. Then, the parties concerned shall contact competent administrative authorities for industry and commerce to go through the formalities for canceling the registration and return the business license of the enterprise for revocation.
It is necessary to state here that under most circumstances, the structure of ownership of a foreign-funded enterprise, after its termination, can be changed through the transfer of shareholding rights, with the Chinese partner or other Chinese enterprises buying the shares held by the foreign partner. An enterprise whose structure of ownership has been changed may continue to operate in a new form after re-registration by competent administrative authorities for industry and commerce.