(This article was first published on China Business Law Journal column "Insolvency & Securitization of NPAs", authorised reprint)
With the transformation and upgrading of industry in China, and progress in supply-side reforms, Chinese legislation concerning the scope of entities with liquidation obligations, and the liability bearable by parties with liquidation obligations, is showing a gradual trend towards broadening and severity, the hope being that this will drive the large number of "zombie companies" in operational difficulty out of the market. Additionally, there are numerous foreign-invested enterprises that have been unable to successfully achieve a transformation, and that are also hoping they can quickly complete liquidation and de-registration procedures and remit the remaining capital back to the investing country. However, in practice, there are many "zombie companies" whose official seals, licences and certificates, financial accounts and/or main personnel are missing for various reasons, and under such circumstances voluntary or compulsory liquidation faces numerous obstacles.
Common difficulties encountered in the compulsory liquidation of companies. Based on the current legal regime in China, liquidation procedures are divided into voluntary liquidation and compulsory liquidation procedures. The term "voluntary liquidation" means a liquidation procedure initiated by a company itself after grounds for dissolution arise, whereas the term "compulsory liquidation" means a liquidation procedure initiated by a people's court after institution of a legal action by a creditor or shareholder.
Based on publicly available cases, the vast majority of courts around the country fail to express any opinion in their rulings terminating a compulsory liquidation procedure on whether the company is subsequently to be de-registered. Under such a circumstance, the company liquidation committee designated by the court remains unable to submit company liquidation materials that comply with the requirements of the Administrative Regulations for Enterprise Registration, also making it impossible for the administration for industry and commerce to carry out the de-registration of the company in accordance with the regulations.
First, de-registration of a company is the main objective of a liquidation procedure and the outcome that naturally follows after the conclusion of a liquidation procedure. Company liquidation is a special procedure that is to be carried out after the dissolution of a company, and its objective is to ultimately extinguish the corporate personality. In other words, even if the compulsory liquidation procedure is terminated, its outcome still signifies the conclusion of the compulsory liquidation procedure and, as such, the company's registration should be cancelled and the company terminated.
Third, if a company cannot be de-registered when liquidation is unable to proceed, a large number of "zombie enterprises" will emerge, something that runs counter to the current policy of intensifying supply-side structural reforms and disposing of zombie enterprises. Once an enterprise goes into liquidation, although it still has legal personality, it may not engage in new business activities. If, under such a circumstance, a company is unable to de-register due to termination of the compulsory liquidation procedure for whatever reason, it will enter into a state of suspension, squatting on a large quantity of public resources, and its shareholders may also be unable to de-register due to their holding of equity in a zombie enterprise, thereby creating a situation where one zombie enterprise gives birth to multiple zombie companies, jeopardizing the national economy.
The change in courts' attitude awaits further observation. Because creditors' rights and debtors' responsibilities differ in various cases, the court and liquidation committee may have reasonable concerns to support a judicial cancellation of registration of the company. After the two cases mentioned in this column, other courts have also followed by issuing similar rulings, showing that, in judicial practice, a positive change in the attitude to the de-registration of a company after the termination of a compulsory liquidation procedure has occurred.