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?