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, deregistration and negotiations. We can help you with the proper completion ofapplication forms, deregistering of certificates and answering & explaining to the tax authorities your actual situation. In this brochure, we will go through all the steps and procedures involved in liquidating a company. Along the way, we’ll discuss thekey challenges, the potential problems & consequences and lastly, some helpful hints to aid your process.

1. Company Liquidation in China
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By the end, you will understand:
 Reasons for Liquidation
 The Liquidation Process & Deadlines
 Settling Assets and Distributing Proceeds
 Deregistration Process
 And more!
Within a survey of 10 consulting
companies the German Institute for
Service Quality (DISQ) announced
ECOVIS as the Best Auditor for Medium-
Sized Enterprises in Germany for 2013!
Company Liquidation:
A Comprehensive guide on how to proceed

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Company Liquidation
Doing business will always have its success and fail-
ures. 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, deregis-
tering of certificates and answering & explaining to
the tax authorities your actual situation. In this bro-
chure, we will go through all the steps and proce-
dures 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.
The Liquidation Process
Once the company has decided and declared its de-
cision 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 liquida-
tion procedure.
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 activi-
ties which ultimately end in the obtaining of the Ap-
proval Letter for the Termination of the Article of As-
sociation of the company. This letter is then submit-
ted with all other liquidation documents to the Admin-
istration 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 au-
thorities and a post-liquidation audit. After this phase,
the company would have officially deregistered.
The First Phase
As shown on figure 2, a rough outline in which some
specific tasks in the first phase need to be complet-
ed.
Figure 1: The Liquidation Process

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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, ac-
cording to the Articles of Association, and more
commonly seen in practice, is the need to unani-
mously pass a resolution for liquidation by the share-
holders 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 complet-
ed application, along with the relevant documents re-
garding the company (e.g. the resolution to liquidate
and company license) to the Beijing Municipal Com-
mission 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 assets.
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 liq-
uidation of the company
 Overseeing the pre- and post- auditing process

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 Value and liquidate the assets of the company
according to the PRC Law and the Articles of As-
sociation
 Formulation of a Liquidation Plan
 Settling all unfinished business, outstanding tax-
es 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 chair-
man has the responsibility to represent the company
towards third parties. In general, the liquidation
committee is usually fully comprised of its sharehold-
ers, where the shareholders then directly participate
in the managing of the liquidation process.
Deciding on the liquidation committee may some-
times 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 in-
volve 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 negli-
gence. 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 liquida-
tion. 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.
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 com-
mercial relationships, terminating employment, sell-
ing 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:
o Liquidation accounting policy including
the period of liquidation, the liquidation
basis & liquidation property payment or-
der
o Situation of liquidation: the liquidation of
creditor’s rights & the debts that have
been cleared by the end of liquidation
o The distribution of the surplus property
o Other instructions

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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 Com-
merce, the authority who registered the approval and
establishment of your company, to hand in your doc-
uments and register the liquidation. This would be the
actual second phase – the settling of assets and the
distribution of proceeds.
The Second Phase
1. Terminating Employee Contracts
The liquidation of a company creates a legal ground
in which a company can lawfully lay off employees.
For foreign invested enterprises, Chinese authorities
often request for an employment settlement report,
including details regarding termination, transfer, no-
tice and severance pay.
In the case where employee contracts are terminated
upon liquidation of the company, the company needs
to pay severance pay. This amount is specifically
calculated based on the PRC laws & regulations and
will vary depending on the individual salaries and the
duration of employment of each employee at this
company.
However, just because liquidation is underway, this
doesn’t suggest that all employee contracts should
be terminated immediately. In fact, it is often the case
and preferential that some employees are kept to
help and support the liquidation process.
2. Liquidation of Company Assets
In the event of liquidation, all fully owned assets by
the company are valued and sold to pay off the liqui-
dation expenses, outstanding debts, fees and taxes.
Helpful hint:
To avoid having potential buyers offer a lower price,
companies can consider starting to sell off assets be-
fore the commencement of liquidation. Though it may
help with getting more valued prices for assets, any
undervalued sales within one year before liquidation
can still be claimed by creditors as a loss to the com-
pany.
It is important to understand that all assets should be
valued and sold at a reasonable amount or it may be
considered as losses to the company, making the
liquidation committee liable for the losses. In practice,
potential buyers knowing that liquidating companies
have to sell their assets, usually offer less as they
know they have more bargaining power.
In addition to the timing of the liquidation of assets,
it’s also important to differentiate the bonded assets
and non-bonded assets. These assets must be dealt
with separately as they have different regulations re-
garding its disposal.
For non-bonded assets, the disposal process is more
lenient, where it can be sold directly for proceeds.
However, for bonded assets, they were imported into
the country exempted from both duty and Value Add-
ed Tax. This means, that this asset cannot be as le-
niently disposed of because if this was to be simply
sold to a domestic entity, it would be cheaper be-
cause of the lack of duty added to its costs.
Helpful hint:
Employees from the sales department and the accounting department can both help with the liquidation process.
The sales employees are more familiar with the company’s clients, making it easier for them to claim outstanding
debts and receivables. The accountants on the other hand can contribute by managing the liquidation balance
sheet, to ensure the payment to all creditors from the proceedings from the sales of assets. Therefore it would
make sense to keep them to support the liquidation process instead of terminating them immediately

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As a result, bonded assets can in theory only be dis-
posed in the following methods:
 Selling the bonded asset to a foreign entity and
directly exporting it out of China
 Selling the bonded asset to a domestic entity and
paying the exempted VAT and duties
3. Collection of outstanding Debt
Once the company enters liquidation, the company
should try to collect all outstanding debt with its cli-
ents and other entities. This would help pay off the
creditors in the next step. However, debtors often see
the liquidation of a company as an opportunity to not
pay back this debt. The reasoning for this is because
though the liquidating company has the right to file a
lawsuit against the debtor, it often results in a costly
and timely process. As this would not only prolong
the liquidation process and possibly eat into the pro-
ceeds to pay off creditors, companies often not pur-
sue the debtor with a lawsuit.
Helpful hint:
A good solution to collecting debt is to transfer the
collection rights to a third party. Therefore collecting
immediate returns, though sometimes at a lower rate.
4. Distribution of Proceeds
After all receivables have been claimed and assets
are converted into proceeds, these proceeds then
need to be paid off to the creditors. The priorities in
which creditors should be paid is outlined by the PRC
law and should be paid in the following order:
Third Phase
1. Post-liquidation Audit
After the settlement of assets and the distribution of
proceeds, a second audit report will need to be done.
This audit process would be similar to the first audit
except with a focus on the balance sheet regarding
the liquidation. Where the first audit was a plan of the
liquidation process, this audit will be verifying the ac-
tual transactions during liquidation. This should in-
clude liquidation expenses, revenue from the assets
and the distribution of proceeds.
2. Deregistration
Once the post-liquidation audit report is completed,
the deregistration processes can then commence.
Certificate approval, business licenses, tax registra-
tion certificate, foreign exchange certificates, financial
certificates, statistical certificates will all need to be
filed for deregistration. This will involve various au-
thorities such as the Ministry of Commerce, the State
Administration of Industry and Commerce, the cus-
toms administration, the tax authorities and the State
Administration of Foreign Exchange. Figure 3 on the
next page shows the summary of necessary deregis-
tration authorities.
One of the key challenges a company will face during
the process is the settling of outstanding and new
taxes with the tax authority. The sources of possible
taxes vary between each company depending on
their situation and trade.
In terms of outstanding taxes, a company may sud-
den face a spike in outstanding taxes due to its
choice to liquidate. Companies who were originally
enjoying the fruits of tax holiday or discounted taxes
sometimes may end up needing to pay the differ-
ence. The reasoning for this is because in practice
these tax reductions are given under the assumption
that the companies will be operating for the whole 10-
year term.

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Figure 3: Summary of relevant Bureaus for
deregistration
In terms of new taxes, a range of taxes can emerge
during the liquidation of assets. Where there is reve-
nue, there often comes tax. The taxes that may arise
include: asset tax, import VAT and custom duty,
turnover tax, individual income tax & corporate in-
come tax.
3. Final Distribution of Funds and Closing down of
bank accounts
To tie up loose ends, the remaining funds after de-
registration should be then distributed to the share-
holders and all company bank accounts should be
closed down.
Main Obstacle
Throughout the liquidation process, with careful fi-
nancial planning and truthful reporting, everything
can potentially run very smoothly. However, whilst
liquidating, there is the risk of a miscalculation or lack
of receivables that may ultimately result in the com-
pany going bankrupt.
Most companies enter liquidation under the impres-
sion that their assets and receivables are able to
cover both the costs of liquidation as well as its
debts. However, due to the wide range of variables
that can alter the company’s ability to pay, i.e. receiv-
ing less for assets or increase of taxes paid, bank-
ruptcy may occur. Just one unsatisfied creditor is
enough to file for the company’s bankruptcy.
In the case of a bankruptcy, the liquidation process
and the company is then placed in the hands of
court. An independent administrator will then takeo-
ver the process and be in charge of further action.
Non-duly liquidation Consequence
Non-duly liquidation can come from a spectrum of dif-
ferent activities. These include: bad faith asset dis-
posal, failure to file Liquidation Audit Report, failure to
properly notify creditors of the liquidation proceed-
ings, as well as unpaid taxes, debts, salaries or so-
cial insurance contributions. The consequences de-
pend on the action, but can generally result in fines,
imprisonment and asset confiscation.
Other than immediate penalties, non-duly liquidation
can also become a barrier for future investments in
China. In fact, to prevent foreigners just leaving Chi-
na and their unfinished business behind, the Chinese
government has prohibited individuals that face civil
lawsuits, criminal charges or have unfulfilled employ-
ee payment obligations to leave the country. This
means that fleeing individuals can face the probability
of a travel restriction that may lead to freezing of as-
sets and a no-departure restraining order.

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