China Rep Offices, Bankruptcies And The Perils Of Being Chief Representative
I know I keep reading how China's economy is just fine, but my firm just keeps getting more inquiries and more work relating to shutting down offices and companies in China.
Of those, the most heartbreaking are coming from Chief Representatives of China Representative Offices who are concerned about their own liabilities when their China Rep Office closes.
Typically, the Chief Representative tells the Rep Office employees that the Rep Office is going to be shutting down. Naturally enough, the employees ask about their getting paid. The Chief Representative usually tells them not to worry, which causes them to worry more and go to their local government. A local government official then comes by and informs the Chief Representative that he or she is PERSONALLY responsible for paying the Rep Office's employee salaries AND all outstanding taxes.
The Chief Representative then contacts my firm and we tell him or her that he or she does indeed run a very real risk of being on the hook for any and all Representative Office debts and so they had better make sure their home office pays. What can happen to a Chief Representative if the home office refuses to pay? We've heard of all sorts of things, ranging from the Chief Representative being held at a hotel for weeks until all debts are paid, to Chief Representatives sneaking out of town and then out of China, under fear of being put on a list that will prevent them from ever returning.
But what happens when the head office/owner of the China Representative Office files for bankruptcy in the United States?
In those situations, we recommend that the Chief Representative hire a US-based bankruptcy lawyer to file a claim against the bankruptcy estate on his or her own behalf. The Chief Representative could claim that the US company owes him or her the amount owed to the Chinese employees and the Chinese tax authorities because the Chief Representative assumed that debt on the home office's behalf. Will this work? We don't know. Yet.
Will the bankruptcy court hold that the Chief Representative is owed anything by the home office in bankruptcy? And even if the bankruptcy court does hold that the bankruptcy estate owes the Chief Representatve the amount the Chief Representative (and the estate) owes in China, is there any basis for the Chief Representative to claim entitlement to any higher percentage on his debt than any of the other unsecured creditors? In other words, will the Chief Representative get anything more than the usual pennies on the dollar creditors usually get? I rather doubt either the employees or the tax authorities in China will cut the Chief Representative much slack simply because his or her home office has filed for bankruptcy in the United States.
Quite the ugly situation. Bankruptcy lawyers (and others), what do you know?
Comments (14)
Read through and enter the discussion by using the form at the endWorried Sick - January 26, 2012 7:47 AM
I hope someone answers your questions because I'm the Chief Rep and my company is talking about filing for bankruptcy. Or maybe I should just leave here now while I still have the chance? But will that mean I can never return?
Bob Walsh - January 26, 2012 12:57 PM
The company we worked with up until last year just up and decided to do a "runner", after stiffing employees on 2 months' wages and Spring Festival bonus. It only had two Chinese employees, but with taxes and penalties, what they and the Nanjing government are owed is pushing north of $30,000.00.
The next time a company we work with insists on opening a rep office, we will make a point to force them to post some sort of reserve account specifically to deal with shutdown procedures.
Mark - January 26, 2012 5:49 PM
Here's another little tidbit. If the company you have worked for as Chief Rep. has not fulfilled it's legal obligation during any dissolution, within two years of employment, you cannot apply to be Chief Rep. again for 5 years. That's the law. This question is specifically asked on the Application for Alien Employment Permit. If you don't ever plan on working in China again, this is no problem. It is a huge problem if you permanently reside here.
Marius Schutz - January 26, 2012 8:31 PM
Canada and most European union countries (I don't know about the US) treat money owed to employees different from ordinary business debt. This also applies for payments withheld from customers and employees for remittance to the government. China does not appear to be all that different in this regard.
Canadian directors of companies have personal liability for these types of company debt. So while the company might be a limited liability company, the directors do not enjoy complete freedom from liability for company debt. They have duties and if they don't like them, they should not accept to be a director - and we often recommend against accepting directorships on these grounds.
So what is different in China?
Rep. offices have no local directors. They are usually overseas. So it appears that the Chinese government treats chief representatives as the "de facto", or if you wish the "proxy", directors for the rep. office. Why the chief rep? Well he or she is the only one around who can be held liable.
What can you do about it?
My first advice to chief reps is to get legal advice, locally in China, before accepting the position. We give the same advice to people invited to become company director anywhere
Secondly, we advice the chief rep to make sure that he or she at all times knows "what is going on at HO". Don't be blind for the many tell-tales that usually precede a major shift in strategy.
Chief reps, like company directors ought to know where it is at. That is their duty.
Moreover, they should advise HO at all times of potential problems and legal consequences before it is too late.
Mi Fu - January 27, 2012 1:40 AM
do you have a link or a source to the relevant law?
if a company owes salaries to the employees, there should be someone responsible.
but a chief rep in general is just an employee of the company, not an owner.
in many cases he/she won't have the financial means to pay the outstanding salaries.
and what is about the salary that HO owes to the chief rep? can he go to a chinese court to claim his/her salary? will companies in the usa or europe accept the decision of a chinese court?
Dd - January 27, 2012 2:21 AM
What about WOFE's and their chief reps?
For a WOFE can we assume the chief rep is in the same hot water as the chief rep of a Rep Office company setup?
cortez - January 27, 2012 7:28 AM
Do you see this as yet another reason not to do a rep office?
Marius Schutz - January 27, 2012 5:30 PM
In response to Mi Fu: We do not give specific legal advice. We only guide SME in the process of setting up. A lawyer in one Canadian province cannot give legal advice in another. There are good reasons for that and they apply to China as well. In all, there are 34 or 35 relatively autonomous jurisdictions in China (not counting major cities) each has its own set of rules. The best we can do is to advice to consult a lawyer in the city where the rep office is going to be.
Yes, to Dd, this applies to WFOE's as well.
Let me use an analogy: Just like a company driver has to follow local driving laws, which may be different from those at home, senior officers of a company have to follow local laws as well. My advice to chief reps. also goes for senior accountants. In Canada, a senior accountant can be held liable for company wrongdoings too! So why not in China!
Kim - January 27, 2012 11:13 PM
Hi Dan, just got done reading the post about the China student in America issue. Great discussion-
Anyhow, I'm not an attorney so I can't provide any legal advice , but I have worked in bky and was a consultant for a notice agent for large corporate bankruptcies across the nation, so my familiarity with the situation is this:
Bky laws have two general separations of time periods for filing two general types of claims:
1. Pre-Petition claim (Any debt incurred before the bky filing date)
2. Post-Petition claim (Any debt incurred after the bky filing date)
The second situation (2. post-petition claim) generally occurs in 11's when the company is still up and running and still has employees, suppliers, and every person who is needed to keep the company functioning. Actually under the bky laws the post petition claim receives a higher status and is considered "priority". Generally, post petition (priority) claims receive 100% distribution. Why? These creditors are needed to keep the company running so a healthy distribution encourages them and protects them. There may very well be post-petition claims in a Chapter 7 (liquidation) for a CEO or any other employee, for that matter, who is still working or is owed post petition funds, until the estate sale by the trustee. If the company who hired the attorneys to file bky are really nice and thoughtful, they will create and Administrative Claim form. This rarely happens. Usually an attorney will write a short brief and file it as an Administrative Claim, on behalf of the creditor. The title of the claim has nothing to do with administration. It simply covers funds that are owed to a creditor that were incurred after the bky filing date.
In Pre-petiton claims, however, the bky court usually sends a simple form, called a Proof of Claim form, to the creditor. This is a pretty standard form. There may be a date by which the form must be submitted (usually to the bky court, but a notice agent may also listed as the recipient). If the form is late by one day, the creditor loses out on the claim, entirely. If the form is filled out incorrectly the bankruptcy court will not fix it. Here, an attorney is helpful because there is a box on every Proof of Claim form that indicates part of the claim is "priority". This is exciting news because priority status usually receives 100% distribution. At least it has a much higher status than a general unsecured claim. Many employee creditors who fill the paperwork out themselves do not check the box marked priority, which protects their wages up to 180 days before the filing, up to $11,725.00. This box would protect (as priority status), not only the wages in that time period, of the CEO, but all of the other employees as well, who are owed funds for that time period (180 pre-filing days). There are other boxes that are "entitled to priority under USC 507", but a proof of claim form can easily be found online, so I won't elaborate.
If there are wages owed to the individual that precede the "180 days before the filing rule", or the individual fails to check the box that designates a portion, or all (whatever is 180 days pre-filing debt) as priority, the creditor will likely get the unsecured creditor (crappy pennies on the dollar) status.
ie: I'm owed $5,000.00 that was earned 180 days before filing. $5,000.00 gets priority status.
I'm also owed $300.00 from more than 180 days before the filing. $300.00 gets general unsecured status (pennies on dollar)
So, to answer your question:
1) Will the bankruptcy court hold that the Chief Representative is owed anything by the home office in bankruptcy?
YES, if the creditor timely files the proper forms and checks the correct boxes (of course, copies of proof are attached to Proof of Claim forms).
2) Is there any basis for the Chief Representative to claim entitlement to any higher percentage on his debt than any of the other unsecured creditors? In other words, will the Chief Representative get anything more than the usual pennies on the dollar creditors usually get?
Off the record, if CEOs suspect a bky filing and they have stock, they usually try to cash it out quickly, as it will be worthless as soon as the company files. Apart from that---He/She could get more than pennies on the dollar under "priority" status on a Proof of Claim for the above mentioned reasons. Bky laws are pretty rigid. Every creditors' claim goes into a category, and the category gets a fixed distribution percentage, having nothing to do with the individual and everything to do with where that claim falls in the bky distribution pyramid. I've spoken with a lot of angry CEOs, so if there's some exception, I don't know about it. Also, if his or her pension is not protected under U.S. ERISA Laws, he or she could risk losing it's entirety. (There are certain types of pensions, usually those of executives, that are not protected).
In the bky pyramid structure of higher distribution to specific categories of creditors, lenders and bondholders usually receive higher distribution percentages. Unsecured creditors get junk. I can send you one page of a typical distribution tier in a bankruptcy if need be. It's fairly standard.
On the other matter, if the tax authorities (etc) in China are unfamiliar with U.S. bky laws it could work to keep him/her from being held personally liable in China, even if he has to "leave because he must show up at the bky court" (He doesn't have to). Otherwise, all employees are actually entitled to file a Proof of Claim for wages in a bky, and check the priority claim section for employees (180 days pre-filing) could be substantial- it's just that they are not likely to be paid quickly.
There is also an Administrative Expense Claim (503B9) that covers only shipments from suppliers, 20 days before the bky filing date. This only includes products, but it could be helpful to protect the value of products that were shipped to the company within the 20 day period before the filing date. It is also given priority status (better distribution percentage). It's very confusing to have the name of this claim be similar to the one that designates post-petition claims, but they are really two claims for two different things. Bky stinks. :) Hope that is at least helpful or a good start and great job!!! There were so many comments on your other post I couldn't really add anything better to it.
Kim - January 28, 2012 5:27 PM
I suppose there is no need to ask you not to post this--brat!
In addition to these very basic guidelines in U.S. bankruptcy proceedings and although an International bankruptcy attorney absolutely should be primarily consulted, I do feel obligated to at least note that it would be helpful if the bankruptcy attorney and all parties in interest are familiar with Chapter 15 Cross Border Cases. “Chapter 15 is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It is the U.S. domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997, and it replaces section 304 of the Bankruptcy Code. Because of the UNCITRAL source for chapter 15, the U.S. interpretation must be coordinated with the interpretation given by other countries that have adopted it as internal law to promote a uniform and coordinated legal regime for cross-border insolvency cases:.
Link:
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter15.aspx
Best!
Kim - January 28, 2012 10:58 PM
“International Insolvency” is also helpful, and as an aside, I don’t believe China has adopted UNCITRAL’s Model Law in regard to Chapter 15 provisions, although it is listed on UNCITRAL’s website as an UNCITRAL member. However, “International Insolvency”, written by U.S. Bankruptcy Court Judges in 2001, (Federal Judicial Center) is particularly informative with regard to U.S. Bankruptcy claims notifications to foreign creditors and extraterritorial provisions of the Automatic Stay:
http://www.fjc.gov/public/pdf.nsf/lookup/IntlInso.pdf/$file/IntlInso.pdf
Notice to Creditors: Pdf page 93/170
“Notice to creditors is essential to the insolvency process. Creditors
must be given notice that a bankruptcy case has been opened so they
know that they are bound by the automatic stay against further
creditor collection activities. Creditors must be given notice of an
opportunity to file claims, and of the deadline therefor. Many other
proceedings in a bankruptcy case require notice to creditors. Giving
notice to foreign creditors, however, poses unusual problems.
One problem relating to notice is the character of the notice itself.
As in the United States, citizens of many other countries are accustomed
to certain formalities (which vary substantially from country to
country) before their legal rights are affected. The notice that is given
in a typical bankruptcy case, after which an action affects a creditor’s
legal rights, frequently does not have this level of formality. In the
United States such notices are given often enough in legal proceedings
that it is not unfair to expect a person to be bound by such a notice.
However, in a country where such notices are unknown or unusual,
it may not be fair to bind a creditor who has only received a
notice that is typical in a U.S. bankruptcy case.
Another problem arises because it takes substantial time for a notice
to be delivered abroad. While a notice by regular mail is normally
delivered within two days in the United States, a notice sent
abroad by regular mail may take a number of weeks to arrive. Even
air mail may take a number of days for delivery. In addition, the typi-
cal notice provisions in the Federal Rules of Bankruptcy Procedure
and local rules may be insufficient to provide meaningful notice to
creditors located abroad.
Increasingly, domestic notice is being given by E-mail and by fax.
These means are especially useful for giving notice to foreign creditors
and parties in interest because such notice is much faster. Of
course, fax numbers and E-mail addresses must be available to permit
notice by these means.
A further problem may arise if a foreign creditor or other party in
interest does not understand the language in which the notice is
written. In this circumstance, the notice may be insufficient for the
foreigner”:
And….
International Insolvency Pdf page 18/170
Reach of the Automatic Stay and the Discharge Injunction
“The provision of U.S. bankruptcy law that is most likely to be invoked
abroad is the automatic stay resulting from the filing of a
bankruptcy case in the United States. The filing of a bankruptcy case
in the United States imposes an automatic stay, arising by operationof law, that prohibits all creditors from taking or continuing any activityto obtain assets of the bankruptcy estate or to collect a debt owed by the debtor.
In due course, the automatic stay is normally replaced by a discharge
injunction, which permanently prohibits all creditors (with
certain exceptions) from taking or continuing any activity to collect
a debt from the debtor or the debtor’s assets. The impact of the discharge
injunction is the same as that of the automatic stay. It thus
has the same extraterritorial effect.
The automatic stay is the broadest form of injunction available in
a U.S. court. Its application is automatic: It applies from the moment
a bankruptcy case is filed, whether or not a creditor has notice of the
filing. Any action taken in violation of the stay is either void or
voidable (depending on the judicial circuit in the United States where
the domestic case is filed).
Under U.S. law, the automatic stay applies worldwide, whether
or not this is consistent with domestic law in the relevant foreign
country. If a creditor violates the stay anywhere in the world, that
creditor is subject to sanctions in the bankruptcy court in the United
States. Sanctions may include the denial of the creditor’s claim and,
in an extreme case, injunctive relief. Such a broad extraterritorial extension of U.S. jurisdiction may be problematic because a foreign country may consider that the application of the United States’ automatic stay within the foreign country’s borders is a violation of its sovereignty. Nonetheless, the automatic stay is not an unusual notion in bankruptcy law.
The bankruptcy laws of most other countries provide for a similar stay or moratorium against creditor collection activities after the commencement of an insolvency proceeding”.
Kim - January 29, 2012 11:14 AM
Final thoughts:
I’ve been pondering Dan’s first question:
“In those situations, we recommend that the Chief Representative hire a US-based bankruptcy lawyer to file a claim against the bankruptcy estate on his or her own behalf. The Chief Representative could claim that the US company owes him or her the amount owed to the Chinese employees and the Chinese tax authorities because the Chief Representative assumed that debt on the home office's behalf. Will this work? We don't know. Yet”.
At first glance, my impression is to offer that U.S. Bankruptcy laws prohibit a debtor from making-post petition payments on pre-petition debt unless it is authorized by the Bankruptcy Court. That is correct. After a company has filed bky, they are not actually permitted to make payments on pre-petition debt independent of Bankruptcy Court express authority. Although the Chief Representative (in the U.S.) is not considered a debtor, making payments to a creditor could be considered as acting as an agent on behalf of the debtor. I question how much that would subsequently restrict his or her ability to then file his or her own claim against the debtor’s estate, which included those assumed payments. In any case, more than one claim can be filed for different kinds of debt, and a claim can be amended multiple times after the Bar Date once it has been timely filed. Despite that general rule prohibiting payment, any CR or individual should be mindful of keeping records to clearly demonstrate proof of payment (to whom, how much, etc), because if there is actually some means to legitimize that action, verified proof is likely to be required.
Notwithstanding, there certainly is recourse through the U.S. bankruptcy court, for certain expedited post petition payments of pre petition debt, to be made. (Usually) the Debtors’ attorneys will file a special Motion with the bankruptcy court and permission to make payments would subsequently be authorized through a Judge’s Order.
This is the best case scenario, because, as the language of “International Insolvency” implies, the Automatic Stay has extraterritorial implications and the actions of creditors (holding someone in a hotel, for example) could actually sanction them from filing a legitimate claim with the U.S. Bankruptcy Court.
I certainly have seen my share of claims from creditors outside the U.S., and explained U.S. bankruptcy court procedures to foreign creditors via email or telephone. The first hurdle in handling the claims of foreign creditors seems to be appropriate notification to them and their comprehension of the bankruptcy notices. If most native English speakers find them confusing, it is not likely that a foreign national will have better luck. Creditors can appear but do not have to appear in U.S. Bankruptcy court, so being overseas is not a weighty limitation in most cases. I would think it to be fairly standard in most U.S. Bankruptcy court jurisdictions, to honor the claims of overseas creditors.
Nonetheless, in order to be properly notified, the debtor company, upon filing bky should provide his/her bky filing attorney will all addresses and contact information for every potential creditor, and every potential creditor should be notified and be extremely mindful of the Bar Date for filing the claim. Bky claims are typically received by mail and should be sent so that proof of delivery is confirmed, such as Certified mail, Registered mail or by Federal Express. Attaching one exact duplicate copy of the signed original claim filed in an S.A.S.E. obligates the Bankruptcy Court or Claims Agent to date stamp it and return a copy to the creditor. Copies of proof of a verified claim probably will need to be translated into English, as I doubt the Bankruptcy Court or Notice Agent will comprehend Chinese.
What would be nice for foreign creditors would be if there was an available agent to help administer the filing of proper claims of foreign creditors in a U.S. Bankruptcy proceeding. It would be a shame to incur all kinds of bad relations (and potentially poor results) through muscling a Chief Representative Officer when there are perfectly legitimate methods of filing a claim with the U.S. Bankruptcy court and a likelihood that a claim will receive priority status and a fair distribution. There are very real benefits to availing oneself to the U.S. Bankruptcy code, although generally speaking, not to general unsecured creditors without priority status, or to stockholders.
That’s just my 2 cents and I hope it is helpful to anyone who is likely to be unfamiliar with basic U.S. Bankruptcy general procedure.
Mi Fu - January 29, 2012 11:07 PM
i have heard that in the USA it is quite common that the CEO has an insurance that covers personal liability.
Does such a kind of insurance exist in China?
Kim - January 31, 2012 10:13 PM
@Mi Fu-excellent question.
I was just trying to look up what the bankruptcy laws are like in China from the New Enterprise Bankruptcy Law: http://www.gov.cn/ziliao/flfg/2006-08/28/content_371296.htm.
I just translated it into English via google translate, and I thought I saw it make mention of personal liability insurance. I'd copy the text for you but google is slow now on translating the document again.
It also strengthens Dan's original suggestion that the Chief Representative file a claim for paid-out wages and government taxes in the Stateside Debtor bankruptcy because it looks very much like it's clearly written in Chinese law that they are holding the legal representative in China, personally liable--for which I think a Bankruptcy Judge would make exception to allow a claim to be subsequently filed to recoup personal funds paid out on the debtor's behalf.
It has also been suggested to review China University of Politics and Law's "Bankruptcy Law Restructuring and Research Center" for a good translation of the New Enterprise Bankruptcy Law, but I haven't been able to find it yet. The first reference I provided is basic, but adequate:
"Article 128 of this Act the debtor Article 31, Article 32, Article 33 of the act, harm the interests of creditors, the debtor's legal representative and other directly responsible personnel shall be liable for damages. Article 129 of the debtor who violate this law, allowed to leave the home to the people's court may reprimand, detention, can legally impose a fine. "
It also indicates they cannot hold the same position for three years, but I don't really know what they count as a violation of "loyalty, etc". What if the bankruptcy is not the fault of management:
"Article 125 corporate directors, supervisors or senior management personnel who violate the duty of loyalty, due diligence obligations, resulting in bankruptcies where, according to the law of civil liability.
Circumstances specified in the preceding paragraph, the personnel, since the bankruptcy proceedings within three years from the date of termination shall not hold any corporate directors, supervisors and senior management".