Company Liquidation: A comprehensive guide on how to proceed [1/4]

By Richard Hoffmann and Michelle Yan, ECOVIS Beijing China

Doing business will always have its success and failures. However, in the case where it really comes down to needing to liquidate your company, there are formal steps in which you should closely follow. The process is long, involving multiple application, de-registration and negotiations. We can help you with the proper completion of application forms, deregistering of certificates and answering & explaining to the tax authorities your actual situation. In this four-part article, we will go through all the steps and procedures involved in liquidating a company. Along the way, we’ll discuss the key challenges, the potential problems & consequences and lastly, some helpful hints to aid your process. In this part, we’ll start with an overview of the whole liquidation process before moving into the first steps for company liquidation.

The Liquidation Process

Once the company has decided and declared its decision to dissolve, the liquidation process begins. The liquidation process can be a lengthy process, usually taking up to 12 months, but may differ depending on the reaction time of the company, the authorities and other unforeseeable circumstances.

Figure 1 below gives a rough overview of the liquidation procedure.

Figure 1: The Liquidation Process

As illustrated in figure 1, the liquidation process can be roughly seen as three phases. The tasks and steps involved in the first stage is mainly the decision making, preparation of documents and other activities which ultimate end in the obtaining of the Approval Letter for the Termination of the Article of Association of the company. This letter is then submitted with all other liquidation documents to the Administration of Industry and Commerce and will start the actual settlement of assets.

The second phase involves the actual laying off of employees, settling of assets and the distribution of proceeds. These processes are where most of the key challenges arise. These challenges will be further discussed below.

The final phase is where all the loose ends are tied up. This involves resolving outstanding payments, applying for deregistration at multiple government authorities and a post-liquidation audit. After this phase, the company would have officially deregistered.

Phase One

The figure 2 below shows a rough outline in which when some specific tasks in the preparation phase need to be completed.

Figure 2: Steps and Timelines during the process

1. The Decision

For every company that decides to dissolve, there is always an underlying reason for it. Some of the common reasons for why a business would decide to liquidate include:

• Terminated by the government due to illegal acts or harming public interest
• Unable to continue business operations because of external forces, such as natural disasters or war
• Expiration of Terms of Operation
• Liquidation due to financial difficulties
• Liquidation due to mergers or split of company

When the decision of dissolution is made, according to Company Law, at least two-thirds of shareholders with voting rights must be represented. However, according to the Articles of Association, and more commonly seen in practice, is the need to unanimously pass a resolution for liquidation by the shareholders or the company’s directors, or both.

2. Obtaining Approval

Regardless of the reason for the dissolution, being a foreign owned enterprise, it will need to first get the permission from the authorities to liquidate before proceeding with the next steps. The company will need to take its correctly completed application, along with the relevant documents regarding the company (e.g. the resolution to liquidate and company license) to the Beijing Municipal Commission of Commerce. This is the Approval Letter for the Termination of the Article of Association of the company. As the obtaining of permission may be a tedious wait, Ecovis Beijing recommends you to make sure you have all the necessary documents ready and the application correctly filled out. This may save you the trouble from going twice or even three times. With this permission, the company can now start settling the assets.

Stay tuned for part two of our four-part series where we will continue down the preparation phase and explain the formation of the liquidation committee, enlighten you on your liquidation notification deadlines and fill you in on the details that are necessary in your pre-liquidation audit.

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