Understanding China’s Simplified Enterprise Deregistration Process

By Tongyu Zhang

On December 26, 2016, China’s State Administration for Industry and Commerce (SAIC) issued guiding opinions on promoting a simplified deregistration process for enterprises, with March 1 2017 set as the date for nationwide implementation. The new procedure’s primary aim is to accelerate market exit for qualified enterprises, including foreign-invested enterprises (FIEs), while also improving the accuracy of data for policymakers regarding business volume, corporate structure, and management.

Simplified application procedure and documents

Companies applying for the simplified deregistration procedure must first publish an announcement for 45 consecutive days through the National Enterprises Credit Information Public System to allow for any objections. The deregistration information must be submitted to the local Administration for Industry and Commerce (AIC), which will then pass it on to the relevant tax, HR, and social security authorities. For FIEs, the Ministry of Commerce (MOFCOM) will also be notified. If there is no objection during the announcement period, the company can apply for the simplified deregistration procedure, and AIC will issue a decision on the deregistration application within three days.

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Under the simplified deregistration procedure, the ‘commitment letter of all investors’ , which covers information such as the investor’s decision, liquidation report, and other related documents, will serve as the key application document and basis for the AIC’s administration and supervision. The following documents are required by the AIC for the deregistration procedure of FIEs:

• The application letter for deregistration;
• The power of attorney to agent;
• Certificate for approval of deregistration by administrative authorities;
• The resolution or decision made by the company according to the Company Law; or the ruling on bankruptcy and the adjudication document on dissolution made by the People’s Court; or documents of the administrative institution on company closure;

Previously, on top of these documents, a liquidation report and the sample of the publicized announcement, certificate of branch deregistration, tax clearance certificate, business license (original and duplicate copy), and other related documents were required to complete the application process.

Applicable scope of the simplified deregistration procedure

Companies legally registered as either a limited liability company, non-corporate legal person, sole proprietorship, or partnership enterprise that had not started operation after obtaining a business license, or had started operation but already settled all of their claims and obligations, can now apply to the local AIC for the simplified deregistration procedure.

Companies under the following circumstances are not qualified for the simplified procedure:

• FIEs involved in special administration measures (industries on the negative list) as stipulated by the state;
• Those recorded on the list of enterprises with abnormal operation, or list of enterprises which have committed serious violations;
• Entities whose equity (investment rights and interests) are frozen or pledged, or its assets are mortgaged, etc.;
• Those under investigation, compulsory administrative measure, judicial assistance, or administrative penalty, etc.;
• Non-legal person branches of the company that have not yet been deregistered;
• Those who have previously been ordered to terminate the simplified deregistration procedure; and
• Those requiring approval before deregistration according to laws, regulations, and the State Council’s decisions.

Legal risks

Submission of false statements or of fraudulent concealment during the simplified deregistration procedure may result in rejection, and may be listed as in violation of the law, being discredited, as well as becoming ‘blacklisted’ through the National Enterprises Credit Information Public System. In addition, parties affected by such conducts may claim damages from the investors of the enterprise, and depending on specific circumstances, investors may also face administrative and criminal punishments.

Observations

As part of a broader commercial system reform, the simplified market exit mechanism promotes business efficiency as well as reduces the additional administrative burdens of an enterprise. However, as for procedures involving several authorities, considerable efforts for coordination across the various administrations will be required, especially for FIEs. In addition, for new foreign market participants, keeping updated with related administrative and public information through different sources, such as local authorities and online platforms, is critical for avoiding legal and business risks.

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