Liquidating Joint Ventures

According to Chinese law, a joint venture may be dissolved in the following situations:

1.  Termination of the duration of the venture

2.  Inability to continue operations due to heavy losses

3.  Inability to continue operations due to the failure of one of the contracting parties to fulfill its obligations prescribed in the agreement, contract and articles of association

4.  Inability to continue operations due to heavy losses caused by force majeure

5.  Failure to obtain the desired objectives of the operation and no prospects for future development

6.  Occurrence of other reasons for dissolution as prescribed in the contract and articles of association

Upon the declaration of dissolution, the company is required to start the liquidation procedures.

For the above (2), (4), (5), (6), the board of directors should make an application to the approving authority for approval, while for above (3), the performing party is entitled to make the application.

Note that according to the Company Law, if a JV makes a substantial loss in operation, but its articles of association do not provide a right to terminate in these circumstances and the shareholders cannot reach a unanimous resolution on termination, a minority shareholder with not less than 10 percent of shares may take legal action to petition for termination. Upon obtaining an order from court, the JV may proceed with liquidation.

Creation of a liquidation committee

1.  The shareholders will need to appoint a liquidation committee to handle the liquidation within 15 days from the dissolution date of the company 

2.  The liquidation committee shall liquidate and value the company's assets in accordance with Chinese law and the articles of association

3.  The liquidation committee shall consist of at least three members and the members usually should be the directors of the board. However, if the director of the board is not suitable to be the member of the liquidation committee; it is common and good practice for the liquidation committee to engage external professional auditors

4.  The liquidation committee shall have the right to terminate employment contracts, to sell, export, transfer, assign or otherwise dispose of any and all assets belonging to the company whether they be inside or outside China, as well as to conclude all business matters of the company, in accordance with Chinese law and the principles set out in the articles of association

5.  The liquidation committee shall exercise the following functions and powers during liquidation:

a) Liquidate the assets of the company, prepare a balance sheet and list of assets, and formulate the liquidation plan

b) Make an announcement for the benefit of unknown creditors and notify known creditors in writing

c)  Complete any unfinished business of the company

d) Submit the appraisal and valuation of assets and the basis for calculation

e)  Pay all outstanding taxes

f)  Pay all outstanding debts in full

g)  Settle all of the company's claims and debts

h) Dispose of the remaining assets after the company's debts have been settled

i)   Represent the company in any civil litigation

j)  Produce the liquidation report and submit it to the shareholders and competent approval authority for approval

To read the full version of this article, please purchase the Closing Down Representative Offices and Liquidating Businesses in China issue of Asia Briefing Bookstore. Companies requiring assistance may contact any Dezan Shira & Associates' nine national offices at china@dezshira.com for advice or visit www.dezshira.com.