Recovery of PRC Assets by Foreign Liquidators

Other than the articles of association and/or the JV contract, PRC law mandates the following procedures that must be carried out in the process of a JV or WFOE dissolution. The first step the JV or WFOE has to undertake is to set up a liquidation committee (consisting of at least three members) within 15 days of the date of commencement of the dissolution process. In the case of a special dissolution, the examination and approval authority will appoint a committee.

Within seven days of the date of commencement of the dissolution process, the liquidation committee must provide written notice to: the examination and approval authority; the department in charge of the industry of the entity; Customs; the administration of foreign exchange; the administration of industry and commerce; the tax authority; and the bank with which the enterprise has opened an account. Also, notice of the entity's dissolution must be made to the administrative department of state-owned assets if the JV holds state-owned assets.

The committee must notify known creditors in writing within 10 days and issue public notices twice within a 60-day period, with the latter intended to target unknown creditors. The committee must also compile a list of the entity's assets, financial statements and conduct an inventory count as well as propose a basis for asset valuation and assessment. These must in turn be submitted to the relevant department in charge of the industry for affirmation and then must be registered with the examination and approval authority.

Further, the committee must devise a liquidation plan within 180 days and submit the plan to the examination and approval authority for approval. The due date may be extended for a period of less than 90 days in special circumstances. An application for extension must be made 15 days before it is due. Obligatory content of the plan includes: reasons for liquidation; the time limit and the process involved in the dissolution of the entity; results of settlement of claims; and payment of debts and results of any disposals of the entity's assets after all debts have been paid.

Within 10 days of submitting the liquidation plan with the examination and approval authority, the committee must cancel the entity's registration with the taxation authority and Customs.

After completion of the liquidation process but before the cancellation of the business registration of the entity at the Administration of Industry and Commerce (AIC), the committee must hand over accounting vouchers, books, statements and other materials to the Chinese partner of the JV or, in the case of a WFOE, must place these documents in the care of a unit designated by the examination and approval authority. Within 10 days of deregistration at the AIC, the committee must publish a notice to proclaim the dissolution of the entity.

The Role of a Liquidation Committee

In China, a liquidation committee has the power to bring civil proceedings on behalf of a company. In this regard, the appointed foreign liquidators have the same legal status as a PRC liquidation committee.¹ However, it must be noted that PRC law does not recognize the concept of "joint and several liquidators". It is generally required that an action be brought on behalf of all of the liquidators. If only one of the liquidators brings a claim on behalf of a company, an exception may only be granted by some PRC courts upon the provision of a foreign legal opinion attesting that the liquidator has the relevant power accorded to him or her to do so. Other documents that must be submitted by the liquidators to bring a claim in the PRC include a foreign court order or a memorandum detailing the creditors' decision to appoint the liquidators. All documents must be notarized in order to be admissible as evidence in a PRC court.

Recovery of PRC Real Property and Assets

In order to realize or recover a company's assets in China, it is common practice for the liquidators to apply for preservation orders with respect to the property in question to prevent the asset from being transferred or disposed of to a third party. The PRC Civil Procedure Law (中华人民共和国民事诉讼法)however imposes a limitation on the liquidators. When the liquidators apply for a preservation order for real property or other assets, the court will require the applicant to provide counter security. The only exceptions are those applications relating to alimony, payment of maintenance, payment of child support and compensation for the disabled, the family of the deceased, medical treatment expenses or remuneration for labour. Securities may be a bank deposit, a property ownership certificate or a letter of guarantee issued by a bank in the PRC (including foreign banks with business operations within China), or a PRC guaranty company. In the event that an application is wrongfully made against a party, the liquidators will have to account for any losses sustained due to implementation of the preservation order.

Caveat over Real Property

Currently, other than Shanghai, most provinces and cities do not allow the registration of an interest of someone who has a potential claim to real property. However, new real estate registration rules in Shanghai allow an interested party, such as liquidators, to file a "dispute registration".² This is akin to a form of caveat, which precludes the transfer or disposal of the property before the dispute with the current owner is resolved. Under the Shanghai rules, the initial registration will be valid for three months; it is not clear, however, from the rules whether the period can be extended.

Endnotes

1 The presumption here is that the PRC court will recognize the foreign liquidators that have been appointed by the foreign court. However, it should be noted that under Chinese law this recognition is not automatic and is subject to the discretion of the PRC court. In the case of Hong Kong liquidators, they may wish to first obtain the legalization and notarization of the court order of their Hong Kong appointment by a PRC attesting officer in Hong Kong as it may facilitate the recognition of their authority in the PRC.

2 See the Shanghai Municipality, Implementing the Real Property Registration Regulations Several Provisions, effective May 1 2003.