£¨Approved by the State Council on 15 June,1996 and Published by the Ministry of Foreign Trade and Economic Cooperation on 9 July,1996)
Chapter 1 General Rules
Article 1 These Rules are formulated pursuant to the provisions of relevant laws with a view to carrying out smooth liquidation of foreign-invested Enterprises, protecting the legitimate rights and interests of creditors and investors and upholding social economic order (hereinafter referred to as "these Rules").
Article 2 These Rules shall be applicable to the liquidation of Sino-foreign Equity Joint Ventures, Cooperative Joint Ventures And Wholly-Foreign-Owned Enterprises (hereinafter referred to as the "Enterprises") duly incorporated within the territory of the People¡¯s Republic of China .
When and where Enterprises are declared bankrupted by law, matters in relation to the liquidation of the Enterprises shall be handled in accordance with the stipulations of the relevant insolvent laws and administrative regulations governing the liquidation matters under such circumstances.
Article 3 Where Enterprises are able to set up their own liquidation committee to carry out liquidation, the provisions under general liquidation of these Rules shall apply; where Enterprises are not in a position to set up their own liquidation committee or the ongoing liquidation carried out under the provisions of the general liquidation encounters serious obstacles, the Enterprises' organ of authorities, such as the Board of Directors or Joint Management Committee (hereinafter referred to as the "Organ of Authorities"), investors or creditors may apply to the Enterprise¡¯s examination and approval authority for special liquidation. The Enterprise approved by the examination and approval authority for special liquidation shall be subject to the regulations on special liquidation under these Rules.
The Enterprise winded up by judicial order in accordance with law and thereby the Enterprise is put into liquidation shall be handled in accordance with the provisions of special liquidation under these Rules.
Article 4 The liquidation of an Enterprise shall be conducted in light of the relevant state¡¯s laws and administrative regulations, based on the joint venture contract and the articles of association approved, following just and equitable principles and protecting the legitimate rights and interests of the Enterprise, investors and creditors.
Chapter 2 General Liquidation
Section 1 Duration of Liquidation
Article 5 The commencing date of the liquidation shall be the expiration date of the term of operation of the Enterprise, or the date the examination and approval authority approves the Enterprise's dissolution petition, or the date indicated in the verdict of the People¡¯s Court or the award of an arbitration institution for the purpose of termination of the joint venture contract.
Article 6 The duration of liquidation starts from the commencing date of liquidation and ends at the date of the submission of liquidation report to the examination and approval authority. However in no event should the duration exceed 180 days.
Should the duration of liquidation be extended under special circumstances, the Committee must submit an application for the extension of the duration to the examination and approval authority 15 days prior to the expiration of the duration of the liquidation but in no event should the extended period exceed 90 days.
Article 7 During the period of liquidation, the Enterprise should not engage in any new business activities.
Section 2 Liquidation Organ
Article 8 To carry out the liquidation, a liquidation committee shall be set up by the Enterprise¡¯s Organ of Authorities (hereinafter referred to as the "Committee"). The Committee should be established within 15 days from the commencing date of liquidation.
Article 9 The Committee shall consist of no less than 3 persons selected either from the members of the Organ of Authorities or retained from the professional field by the Organ of Authorities.
One director shall be appointed in the Committee by the Organ of Authorities. Subject to the approval of the Organ of Authorities, the Committee may recruit personnel to handle the specific matters in connection with the liquidation.
Article 10 During the period of liquidation, the members of the Committee should be replaced upon the occurrence of:
The member of the Committee violates law, or,
The creditor makes such request which is properly justified, or,
The member of the Committee dies or loses his/ her capacity of act.
Article 11 During the period of liquidation, the Committee shall exercise the following functions:
Clearing the Enterprise¡¯s assets, preparing the balance sheet and the list of assets, formulating the liquidation plan;
Making a public announcement to the unknown creditor and informing the known creditor in writing;
Winding up Enterprise's outstanding business in connection with the liquidation;
Presenting the criteria for evaluation and calculation of the assets;
Settling up and turning in the Enterprise¡¯s tax arrears;
Clearing debts and settling rights of creditor;
Disposing of the remaining assets after the settlement of all debts;
Representing the Enterprise to participate in civil actions.
Article 12 The balance sheet, list of assets, criteria for evaluation and calculation of the assets, and the liquidation plan presented by the Committee should be verified by the Organ of Authorities before submission to the examination and approval authority for the record.
Article 13 After the establishment of the Committee, relevant personnel of the Enterprise shall, within the time limit specified by the Committee, present the Committee the Enterprise¡¯s accounting statement, account books, assets catalogue, list of creditors and debtors and other information in connection with the liquidation.
Article 14 The Committee shall undertake its obligation of liquidation in accordance with law and handle the matters of liquidation on the principle of consultation.
The members of the Committee must perform their duty with integrity, refraining from abusing their power to take in bribes or seek illegal gains. They should not embezzle the Enterprise¡¯s assets.
Article 15 During the period of liquidation, the examination and approval authority and other competent authorities may send delegates to sit in the meetings concerning the liquidation for supervision.
Section 3 Notification and Public Announcement
Article 16 The Enterprise should, within 7 days from the commencement of the liquidation, notify in writing the examination and approval authority, its supervising authorities, the Customs service, the foreign exchange control authority, the registration authority, the tax authority and the bank where it opens its accounts of its name, domicile, causes for liquidation and the commencement date of liquidation; where there involves state assets, notification should also be made to the state assets administrative authority.
Article 17 The Committee should, within 10 days after its formation, inform the known creditors in writing for the purpose of reporting their claims, and within 60 days after its formation, make public announcement at least twice in a national newspaper, or in the provincial or municipal newspapers where the enterprise is located. The first announcement should be made within 10 days after the formation of the Committee.
The liquidation announcement must specify such particulars as the Enterprise¡¯s name, address, causes for liquidation, commencement date of liquidation, mailing address of the Committee, name list of the Committee and persons to contact.
Article 18 The creditors should report their creditor's right to the Committee within 30 days after receipt of the notification. Those who did not receive the notification must report their creditor's right within 90 days after publication of the first public announcement.
Article 19 The creditors must report their creditor's right within the specified time limit, indicating the aggregate amount of the claims and producing documentary evidences of the claims.
Those who did not report their creditor's right within the specified time limit as required shall be subject to the following regulations:
The creditor's right of the known creditors must be included in the liquidation;
The creditor's right of the unknown creditors may be settled before the conclusion of the allocation of the remaining assets; where the allocation of the remaining assets has concluded, the creditor's right shall be considered having been waived.
Section 4 Claims, Debts and Liquidation
Article 20 The Committee shall register the creditor's right reported by the creditors and notify the creditors in writing of the results after the verification to that effect is completed.
Article 21 If the creditor challenges the Committee¡¯s verification results mentioned in the preceding paragraph, the creditor may request the Committee for reverification within 15 days after receipt of the written notification; if the creditor still challenges the reverification results, he/she may, within 15 days after receipt of the written reverification results, institute legal proceedings with the people¡¯s court in the district where the Enterprise is located; if there is an arbitration agreement between the creditors and the Enterprise, the dispute must be resolved through arbitration in accordance with law.
During the period of legal proceedings or arbitration, the Committee should not allocate any disputed assets.
Article 22 The Committee shall report in writing the inventory profits or losses, realization of the assets, debts which can not be repaid or claims which can not be recovered, gains and losses occurred during the period of liquidation, and shall give the reasons and the proofs whereof to the authorities. The above-mentioned factors should be reflected in the statement of income and expenditure of the liquidation.
Article 23 The following liquidation expenses shall enjoy preferential payment from the liquidated assets:
Expenses necessary for management, realization and allocation of the liquidated assets;
Expenses for public announcement, litigation and arbitration;
Other expenses occurred during the period of liquidation.
Article 24 For those creditor's right secured against assets before the commencement of liquidation, the creditor shall enjoy preferential compensation against the assets. Where and when the value of secured creditor's right exceeds the value realized by the assets, the unsettled part of the creditor's right shall be repaid by the order specified in Article 25 of these Rules.
Article 25 The liquidated assets, after preferential payments have been repaid, shall be settled in the following order:
Wages and labor insurance of the employees;
Taxes to the State;
Article 26 Before the compensation of liquidation expenses and the settlement of debts, the Enterprise¡¯s assets shall not be allocated.
The Remaining assets after the compensation of liquidation expenses and the settlement of debts shall be allocated in light of the actual investment proportions by the investors except where laws, administrative regulations, or the Enterprise¡¯s contract and the articles of association provide otherwise.
Article 27 In the process of liquidation, where Enterprise is found that its assets are not sufficient to cover its debts , the Committee shall apply to the people¡¯s court for declaring the Enterprise bankrupt; the declaration of bankcrupcy of an Enterprise shall be handled in light of the liquidation laws and administrative regulations governing bankcrupcy.
Article 28 Within 180 days prior to the date of the commencement of liquidation, the Enterprise¡¯s following activities are deemed invalid:
Transferring the Enterprise¡¯s assets for free;
Selling the Enterprise¡¯s assets at an abnormally reduced price;
Providing security against originally unsecured debts;
Settling undue debts;
Waiving right of claims of the Enterprise.
From the commencement till the completion of the liquidation, neither Chinese nor foreign investors shall dispose of the Enterprise¡¯s assets.
Section 5 Evaluation and Disposal of Liquidated Assets
Article 29 The evaluation of the liquidated assets shall be conducted in accordance with the following regulations:
Where stipulations in relation to the assessment of the liquidated assets are set forth in the Enterprise¡¯s contract and the articles of association, these stipulations shall apply;
Where no stipulations are specified in the Enterprise¡¯s contract and the articles of association, the matters in relation to the evaluation shall be decided through consultation between Chinese and foreign investors and the result of which shall be submitted to the examination and approval authority for approval;
Where there is no stipulations in relation to the assessment of the liquidated assets specified in the Enterprise¡¯s contract and the articles of association while Chinese and foreign investors fail to reach consensus through consultation in this regard, matters in relation to the assessment shall first be decided by the Committee as per the state¡¯s relevant regulations and with reference to the advice of the assets appraisal institution and thereafter submitted to the examination and approval authority for approval;
Where a court¡¯s verdict or an arbitral award terminates the Enterprise¡¯s contract and specifies the methods for assessment of liquidated assets, the verdict or the award shall apply.
Article 30 When and where the liquidated assets are sold, the Enterprise¡¯s investors shall have the right of preemption. The assets shall be sold to the party who offers a higher purchasing price.
Section 6 Conclusion of Liquidation
Article 31 The Committee shall, after going through all the procedures specified in the liquidation plan, prepare a liquidation report, covering the following particulars:
The cause, duration and proceedings of the liquidation;
The settlement of claims and debts;
The disposal of the liquidated assets.
Article 32 After verified by the Enterprise¡¯s Organ of Authorities, the liquidation report shall be submitted to the Enterprise¡¯s examination and approval authority for the record.
Article 33 Within 10 days after submission of the liquidation report to the examination and approval authority, the formalities for canceling the Enterprise¡¯s registration must be carried out by the Committee with the tax authority and the Customs Service.
The Committee shall, within 10 days after the completion of the above-mentioned formalities for canceling the Enterprise¡¯s registration with the tax authority and the Customs Service, submit the liquidation report together with the registration cancellation certificates issued by the tax authority and the Customs Service to the Enterprise¡¯s registration authority for the cancellation of its enterprise registration, hand in the business license for cancellation and make public announcement of the dissolution of the Enterprise in a national newspaper as well as in a local provincial or municipal newspapers.
Article 34 After the completion of the liquidation and before carrying out the formalities for cancellation of the Enterprise's registration, the following accounting documents, account books and accounting statement kept by the Enterprise shall be handed out by the Enterprise as per the following regulations:
In case of Sino-foreign equity joint ventures and cooperative joint ventures, the above-mentioned documents shall be kept by the Chinese investor; Where there are two Chinese investors involved, the supervisory authorities of the Enterprise shall appoint one Chinese party to keep the documents;
In case of the wholly foreign-owned enterprise, the Enterprise¡¯s examination and approval authority shall appoint an agency to keep the documents.
Chapter 3 Special Liquidation
Article 35 The date confirmed by the examination and approval authority for a special liquidation or the date ordering a regulatory wind-up of an Enterprise shall be the commencement day of a special liquidation.
Article 36 While conducting a special liquidation, the Enterprise¡¯s examination and approval authority or a department authorized thereby shall set up a liquidation committee consisting of delegates from the Chinese and foreign investors, representatives from relevant agencies and relevant professionals.
Article 37 One director shall be appointed in the Committee by the Enterprise¡¯s examination and approval authority or the department authorized thereby. During the period of special liquidation, the director of the Committee exercises the power in such a capacity as a legal representative of the Enterprise and the Committee exercises the Enterprise¡¯s Organ of Authorities' power.
The Committee is responsible for the matters related to the liquidation of the Enterprise and shall report to the examination and approval authority.
Article 38 The Committee may convene meetings on the Enterprise¡¯ Organ Authorities' behalf or call meetings of creditors to discuss the specifics of the liquidation.
Article 39 All the creditors shall be the members of the creditors¡¯ meeting, enjoying the right of vote. The creditors with secured claims who did not intend to waive their priority right to be repaid shall not have the voting right in such a case.
The chairman of the creditors¡¯ meeting shall be selected among the voting creditors by the examination and approval authority or the agency authorized thereby.
Article 40 The creditors¡¯ meeting shall be called by the Committee. The Committee shall, 15 days prior to the assembly of creditors, notify creditors in writing. Where the creditor is not able to attend the meeting, an agent must be appointed in writing to sit in the meeting.
Article 41 The creditors¡¯ meeting exercises the following functions:
Reviewing the documentary evidence provided by the creditors in relation to their claims; verifying the amount of creditors' right and the security, if any;
Contributing their ideas to the Committee on the liquidation plan and the settlement of debts.
Article 42 The liquidation plan and the liquidation report prepared by the Committee must be verified by the examination and approval authority.
Article 43 Issues related to special liquidation which are not specified in this Chapter shall be subject to the provisions of Chapter 2 of these Rules.
Chapter 4 Legal Responsibility
Article 44 During the period of liquidation, where the Enterprise engages in new business actives, the Enterprise¡¯s registration authority shall order it to correct and impose a fine of 10 to 100 thousand Yuan.
Article 45 Where the Enterprise fails to notify creditors or make public announcement as stipulated in Article 17 hereof, the Enterprise¡¯s registration authority shall order it to correct and impose a fine of 10 to 100 thousand Yuan.
Article 46 During the period of liquidation, where Chinese and/or foreign investors dispose of the Enterprise¡¯s assets in violation of the provisions under Clause 2, Article 28 of these Rules, the Enterprise¡¯s examination and approval authority shall order them to restore to the original state or return the assets disposed of; where damage is occurred, the liability of compensation must be assumed in accordance with law.
Article 47 Where the Committee does not submit the liquidation report to the Enterprise¡¯s examination and approval authority for the record as well as the Enterprise¡¯s registration authority as specified in Article 32 and 33 of these Rules, where the report withholds important facts or contains material omissions, the Enterprise¡¯s examination and approval authority and the registration authority shall order it to correct.
Where the Committee fails to carry out the formalities for the Enterprise¡¯s registration cancellation as stipulated in Article 33 hereof, the Enterprise¡¯s registration authority shall revoke its business license and make a pubic announcement thereof.
Article 48 During the period of liquidation, where the Enterprise conceals its assets, makes fraudulent statements in its balance sheet or the list of assets, or allocates the assets before the payment of liquidation expenses and the settlement of debts, the Enterprise¡¯s examination and approval authority and the registration authority shall order it to make corrections. The registration authority shall impose a fine of 1% to 5% of the value of the concealed assets or the assets allocated before the settlement of all debts; personnel directly in charge and other responsible persons shall be imposed a fine of 10 to 100 thousand Yuan.
Article 49 Where the Committee member abuses his/her power to engage in fraudulent acts, seek illegal gains, or appropriate the Enterprise¡¯s assets, the Enterprise¡¯s examination and approval authority and the registration authority shall order it to return the assets appropriated and confiscate all the illegal gains and impose a fine of 1 to 5 times the value of the illegal gains.
Article 50 Anyone violates the provisions of these Rules and thereby commits criminal offenses shall be subject to criminal prosecution in accordance with law.
Chapter 5 Annex
Article 51 These Rules shall come into force as of the date of its promulgation.
This translation, together with any explanatory material, is provided courtesy of Lehman Tax & Accounting.