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shut down a business in China

Daxue Talks transcript #55: The legal procedure to shut down a business in China

Find here the Daxue Talks 55 interview. In this episode, Nicolas Coster, a business lawyer based in Shanghai, answers our questions concerning the procedure required to shut down a business in China.

Full transcript below:

I am Nicolas Coster, I’m a French business lawyer. I’ve been in China for 16 years and specialized in foreign direct investment. So, basically, I set up companies in China.

What are the risks to be aware of in China when we want to close a company?

Okay, so, when you want to close a company, the first phase you need to know is you will have a tax liquidation of the company (learn more about corporate taxes in China). Which means that the tax office will check that you paid all the tax of the company 3 – 6 years back from the date of the liquidation, and sometimes until the date of creation or the setting up of the company. So, if you are not very clean with the tax then you will have to pay all the tax, plus fine.

What is the procedure for closing a company in China?

So, basically you have two proceedings for shutting down a business in China, all investors decide to early terminate the company, that means when you set up the company you have a term of the company, normally like 30 – 50 years and the investors can decide by himself to stop and to liquidate the company. This is what is called the early termination of the company. That means the company is not bankrupt, the company still has some money and investors apply to the ministry of supervision for the market to cancel the company. This is the first proceeding. And the second proceeding is a bankruptcy proceeding, which means the company doesn’t have enough money to pay all the debts of the company.

How long does it take to close a company with no bankruptcy procedure?

Okay, for early termination it really depends on the first step of the early termination, its tax liquidation. So, if the tax liquidation is smooth, let’s say 2-3 months to close the company. If you have an issue with the tax liquidation, it could be much more longer.

Any difference between Joint Ventures or WFOEs or Legal representatives when it comes to closing a company?

From a proceeding point of view, you don’t have any differences. There is a big difference between a WOFE and a joint Venture is that to close a company you need the agreement of all the investors. So, that means your Chinese partners need to accept the shutting down a business in China, that’s why for my firm we have JD who is in a bug for many, many years because the Chinese investors don’t want to cancel the company.

Are there any big differences between China and Europe and the US in terms of closing a company?

Yes, of course, you have differences, the big difference is the spirit, that means bankruptcy law in China, it’s not very old – let’s say the first law was in the 1990s and it was not very well applied. Five years ago, I need like two years for the judge to accept my application to shut down a business in China for bankruptcy. So today China is aware they have a big issue with bankruptcy and company’s and they are creating special tribunals for bankruptcy cases and to speed up the process, because they want to avoid having too many ghost companies in China. So, you don’t have so many lawyers in China and so many judges who have a long practice of bankruptcy. That’s a big issue and a big difference between China and the rest of the world.

Is there any chapter in China similar to chapter #11 in the US, which allows a company some time to survive?

No, no. there is no equivalent to chapter 11. What happens when you apply for bankruptcy, you have to make it as fast as possible because as there is still a trend that the creditor of the company will sue the company in another tribunal, and even if you apply for the bankruptcy until the bankruptcy is accepted by the judge, the roadshow will not stop.

What happens to the employees when a company closes?

In practice, we don’t have employees when the company is closed because the first things we do when we know we are going to shut down a business in China or it’s going to go to bankruptcy, is we negotiate with the employee to terminate the legal contract. So, from the practical point of view, most of the time we don’t have any employees, because it is possible to terminate the legal contract in China if you’re going to liquidate the company. You just need to pay the legal compensation.

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