Blog

Bankruptcy procedures in China

Find here Daxue Talks episode 57. In this interview, Nicolas Coster discusses the bankruptcy procedures in China to help entrepreneurs understand the different risks they encounter.

Full transcript below:

What is a procedure for bankruptcy in China?

The procedure for bankruptcy, you need to apply to the tribunal to file a lawsuit. So, the company can do it by itself, it could be one employee of the company who didn’t get pay or it could be creditors of the company. So, any third party to which the company owes some money is able to go to the court and apply for bankruptcy. In this case, you go to the court, you have to prove that the company is in bad shape, the company owes you money and is not able to pay you money and the judge, therefore, will accept the case and may appoint what we call bankruptcy liquidator to recover the debt and to pay anyone else you have to pay, with the assets of the company.

Are there any differences between bankruptcy for JV and WFOE?

From the policy point of view, there is no difference, this is just from the decision of – for bankruptcy there is no decision of investors, so no there is no difference.

How long does the bankruptcy procedure process last?

It could be a long process, let’s say if you go to a big city like Shanghai, Beijing, you can close the bankruptcy within six months to twelve months. But if you go to smaller cities, it’s like 5 years.

What are the risks for a limited company in a bankruptcy process?

For a limited company, the risk for the investor depends if they pay or they didn’t pay the registered capital. If they can prove they paid the registered capital, normally the judge or the creditor cannot go over the registered capital, so the investor has nothing else to pay. If they didn’t pay the registered capital, they will have to cover the gap between what they pay, what they contribute, and what is outstanding.

What happens to employees when a company gets bankrupt?

The companies – we terminate the contract very quick and of course, when you go bankrupt, for the asset of the companies, the priority rights will go to the tax office and the employees.

What happens to investable assets such as trademarks when a company is going bankrupt? Can someone register them right after the bankruptcy?

Now for the intangible asset, the liquidator will sell them and probably they will organize an auction and some party will be able to buy it.

Can the legal representative be considered responsible in the case of bankruptcy?

No, in most cases the representative will not be responsible and will not have to pay money from his pocket during bankruptcy procedures in China. But sometimes if there is any doubt from the tax office, the tax office can ask the legal head to stay in China and the legal head will not be able to travel outside China. So, it really depends on how each case is but there is a risk for the legal head to stay in China until the bankruptcy process is closed definitely, which could be some months.

Is there a blacklist of the legal representatives of bankrupt companies?

No there is no blacklist like that but those investors will be blacklisted and sometimes the judge can decide the because you’ll do something wrong that’s why the legal head will not be able to have another job as a legal head in another company, but it’s very rare from my experience.

You said, that there is a blacklist of investors. If the investor is the company itself, is the company itself blacklisted? Or rather, are the people responsible for the company blacklisted?

No, the company itself. The company of the investors, that means if they want to apply to another company, it’s possible that the ministry of market supervision will not accept the application to set up a new company.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.