Company Liquidation: A comprehensive guide on how to proceed [2/4]

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 second part of the four-part series, we move on from having obtained the approval to liquidate and moving on into the formation of the liquidation committee all the way to the submission of documents to the Administration of Industry and Commerce. That would be the last step before the official settlement of assets and distribution of proceeds start.

3. Liquidation Committee

Once the decision has been made and the necessary permission obtained, the company is then required to form the liquidation committee within 15 days.

The liquidation committee will take responsibility for and manage the liquidation process. The idea of the liquidation committee is that they report back to the shareholders regarding the progress of the liquidation process. The main responsibilities of the liquidation committee include:

• Notifying the general public & creditors of the liquidation of the company
• Overseeing the pre- and post- auditing process
• Value and liquidate the assets of the company according to the PRC Law and the Articles of Association
• Formulation of a Liquidation Plan
• Settling all unfinished business, outstanding taxes and debts
• Produce and obtain confirmation of Liquidation Report from the Board of Directors and then the approval from Authorities
• Overseeing the deregistration of tax, customs, foreign exchange, social insurance, etc.
• Closing down bank account

The liquidation committee is comprised of generally at least 3 members including a chairman. The chairman has the responsibility to represent the company towards third parties. In general, the liquidation committee is usually fully comprised of its shareholders, where the shareholders then directly participate in the managing of the liquidation process.

Deciding on the liquidation committee may sometimes be a complex process, as shareholders need to assure that their interests are represented. However, at the same time, the liquidation committee must be first and foremost working towards the interest of the company and its creditors. Though shareholders may be the main creditors in this case, but it may also involve other parties as well.

It is important to note that any action committed by either the liquidation committee or an individual committee member that results in losses to either the company or creditors may be held personally liable. This can be either intentional or due to gross negligence. The consequences can be quite severe.

4. Liquidation Notification

From the establishment of the liquidation committee, they have 10 days to notify the company’s creditors and 60 days to notify the general public of the liquidation. After the notification to the creditors, the known creditors then have 30 days to submit their claims. For the unknown creditors, they have 45 days after the public notification to submit their claims. This is the opportunity for the creditors to tell the liquidation committee further details on the stakes they have in the company.

Figure 2: Steps and Timelines during the process

5. Stopping new business initiatives

Once the company has been registered and declared to be liquidating, the company is required by law to abstain from all business activities except for those involved in the liquidation process. This means that no new businesses initiatives should be taken on and only activities involving the ending of existing commercial relationships, terminating employment, selling assets, etc.

6. Pre-Liquidation Audit

The first audit in the liquidation process is after the approval from the authorities for termination is given. The Pre-Liquidation Audit Report is to ensure the tax authorities that the business dealings and company accounts were valid and in proper order prior to the liquidation decision. Therefore, the Pre-Liquidation Audit will need to cover but not limited to:

• A summary of the financial position – the results of its operations and cash flows – starting from the day the liquidation team is set up to the date the report is done
• A summary of the liquidation process, which is in compliance with the law. This should include:
  • Liquidation accounting policy including the period of liquidation, the liquidation basis & liquidation property payment order
  • Situation of liquidation: the liquidation of creditor’s rights & the debts that have been cleared by the end of liquidation
  • The distribution of the surplus property
  • Other instructions

7. Submitting of Documents

Having completed the first 6 steps of the first phase of the liquidation process, you are ready to head back to the Administration of Industry and Commerce, the authority who registered the approval and establishment of your company, to hand in your documents and register the liquidation. This would be the actual second phase – the settling of assets and the distribution of proceeds.

Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. Moreover, Ecovis was awarded the No. 1 auditing firm for mid-sized companies in Germany in 2013.If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com