China Law Blog

Just about whenever I read about some company leaving China in the middle of the night, I think about the Baltimore Colts and this line from "Beware: Do Not Read This Poem":

statistic: the US bureau of missing persons re-
ports that in 1968 over 100,000 people
disappeared leaving no solid clues
nor trace only
a space in the lives of their friends

Then I wonder if the company that has left China without leaving much of a trace realizes that it and most of its people just made it difficult/impossible to ever return to China.

There is a right way and a wrong way to shut down your China business and guest writer, Robert Zierman, will explain the difference. Robert recently started working with my law firm after many years spent as an in-house counsel in China and running his own China related businesses.

Here goes:

On November 19, China's Commerce, Foreign Affairs, Public Security and Justice, issued Working Guidelines on Cross-border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with Abnormal Withdrawal from China of Foreign Investors. The mere fact that these four ministries got together on this at the inception of massive factory shutdowns in China is a good indication of how important these guidelines are meant to be.

The aim of the guidelines is to prevent foreign-invested enterprises (FIEs), or more realistically the owners and managers that run them, from shutting down their China operations without “undertak[ing] proper closure procedures” relating to “creditors, employees, and other affected parties.”

China's Company Law states that foreign individual or corporate shareholders can, under certain circumstances, be held civilly liable for the obligations of their China company. In legal speak, this means that creditors may pierce the corporate veil to get at those who own and/or run the foreign company doing business in China.

Though leaving in the middle of the night has some obvious short term advantages, the reality is that the smarter long term decision will likely be to follow China's company dissolution rules. There are a couple reasons for this. First, China claims it will pursue you for liability back in your home country. And though I have my doubts about their actual resolve and ability to do this, it certainly is not a good thing to be facing a law suit where you live. Second, if you ever want to go back to China for any reason, leaving a whole slew of creditors hanging high and dry is not the way to get that coveted China visa. We have heard through reliable sources that those who "abandon" China will/have become persona non grata and will never be allowed back. Are you really reading to foreclose the opportunity of ever doing business in or with China again?

Not that proper dissolution is cheap or easy, as it typically involves the following:

-- informing all creditors of the closing
-- resolving all pending transactions
-- settling all outstanding taxes.
-- liquidating company property
-- officially de-registering the company with the government

If company assets are insufficient to pay the company's outstanding debt, it should file for bankruptcy.

We are actually working on a matter right now for a good-sized US company that was in China until a few years ago and then left without following all of the proper procedures. The company has retained us to get back into China and we are having to go back and do the various things it should have done upon its initial exit. Because this company was actually current on its taxes and debts when it left China, it will be allowed to return. However, it is having to work with (and pay) former employees to get everything done and this is making things much tougher and more expensive than it would have been had all matters been properly handled when the company originally left China.