China simplifies procedures for enterprise de-registration and market exit

Following the amendments on the Chinese Company Law on 1 March 2014, from 1 March 2017, the State Administration of Industry and Commerce (“AIC”) of the People’s Republic of China has also implemented reforms to simplify the enterprise de-registration process nationwide. This will lead to a more efficient market exit lowering market exit costs for certain companies in China.

The new legislations do not only establish an enterprise registered capital registration system which lowers the market entry threshold, but also greatly facilitate an efficient market exit for certain qualified enterprises. This includes foreign invested enterprises in China.

In this article, we will introduce this simplified enterprise de-registration reform in the aspects of requirements and procedures. While actual implementation by local AICs might be subject to slightly different approaches, we will illustrate this article through known practice by the Shanghai AIC, as the simplified enterprise de-registration procedures have been tested as a pilot project in Pudong New District and Free Trade Zone since September 2015.

Qualification for the simplified enterprise de-registration procedures?

In general, the below enterprises are qualified for the simplified enterprise de-registration procedures:

  • enterprises which have not started business
  • enterprises without debtor-creditor relationships or debts and credits have been cleared before the simplified de-registration application

Applicable legal entities include limited liability companies, non-corporate legal persons, sole proprietorship and partnerships. According to the Shanghai AIC, a consideration will also be whether the enterprise has been in existence for less than three years , whether the enterprise has started operation (including its tax filing status) or whether the enterprise has any debts or credits (including tax dues).

Even for bankrupted enterprises which are taken over by the court, there is still the possibility to apply for the simplified de-registration procedures with local AIC.

Non-qualified enterprises for the simplified enterprise de-registration procedures

It is clearly indicated by AIC that the below enterprises are not qualified for the simplified enterprise de-registration procedures:

  • foreign invested enterprises who fall into the national entry special administrative measures;
  • Blacklisted enterprises
  • Enterprises involved in litigation or administrative procedures
  • Enterprise whose branches (non-legal person) have not been de-registered yes
  • Enterprises whose simplified de-registration procedures were suspended before
  • Enterprises whose de-registration requires pre-approval
  • Other situations where simplified de-registration procedures do not apply

Steps involved in the simplified enterprise de-registration procedures

If an enterprise is qualified for the simplified enterprise de-registration procedures, the below steps will need to be carried out and the investors of the enterprises are responsible for the authenticity and legality of the submitted documents:

  • A notice period of 45 days on the national enterprise credit information publicity system (the notice period is 10 working days for the Shanghai pilot project)
  • If no rejection upon the expiration of the notice period, submission of the application documents to the local AIC
  • The local AIC will make a decision within 3 working days (5 working days for the Shanghai pilot project)

It is very important to note that for the simplified de-registration application, it is not necessary to submit the liquidation report, the investors’ resolution, the tax declaration certification or the registration certification of the liquidation committee as a part of the required documents. Smooth de-registration procedures normally take no less than 6 months while the said simplified de-registration procedures will greatly shorten the period. However, according to the Shanghai AIC, tax de-registration procedures are still required for the simplified de-registration procedures within its jurisdiction.

Remedies for the wrongful simplified de-registration procedures

Simplified de-registration procedures are highly dependent on the honesty of the applying enterprises, wrongful simplified de-registration procedures may occur unfortunately sometimes. In that case, the remedies can be sought include:

  • The Local AIC can revoke its approval on the simplified de-registration procedures
  • The enterprises can be blacklisted and published online
  • The interested party can claim civil and/or criminal liabilities against the investors

Due to the fact that the enterprise simplified de-registration reform has only been introduced to the entire country recently, there might be delays and differences in the implementation by local AICs. For this reason we strongly recommend that for those who are qualified for the simplified de-registration procedures to conduct prior consultation with the local AIC in the jurisdiction where the enterprise is registered.