Close a company in China
In order to further improve the efficiency of social resource utilization, reduce the exit cost of market entities, optimize the business environment, and continue to stimulate market vitality, China has continuously promoted reforms to its system of enterprise deregistration.
As the COVID-19 pandemic broke out in early 2020, many entities had to undergo self-liquidation, compulsory liquidation, or bankruptcy liquidation due to the deterioration of the market environment and difficulties in carrying on their business operations.
For China investors and/or shareholders, the application of online deregistration (or e-deregistration) can speed up the exit of enterprises and reduce exit costs, which is the best choice. But, it is important to understand the practical differences between e-deregistration and the general deregistration system and their respective liability.
Investors who intend to use the e-deregistration model should pay attention to the relevant legal issues to avoid unnecessary legal risks due to a hurried exit.
Simplified enterprise deregistration procedures
At present, all provinces and cities have basically realized the “one network” service of enterprise deregistration. According to the relevant provisions of e-deregistration, enterprises can carry out e-deregistration procedures as follows:
First, enterprises actively announce to the public that they intend to apply for e-registration through the “E-registration Announcement” column of the National Enterprise Credit Information Publicity System. The announcement period for the new pilot area of the Notice on Further Improving the Pilot Reform of E-deregistration is 20 days, and that of the non-pilot areas is 45 days.
After that, the enterprises submit the “Application”, “Power of Attorney for Designated Representative or Joint Agent”, and “Commitment Letter of All Investors” (the enterprises subject to compulsory liquidation shall submit the ruling of the People’s Court to terminate the compulsory liquidation procedure, and the enterprises that have ended bankruptcy procedures shall submit the ruling of the People’s Court to terminate the bankruptcy procedures), the original, and the copy of the business license.
After submitting the documents, the registration authority will conduct a formal review of the application materials. For applications that do not apply to the e-deregistration conditions, the registration authority will notify the applicant in writing (electronically or otherwise).
For enterprises that are objected to during the announcement period, the registration authority will decide not to grant e-deregistration within three working days (if an enterprise subject to the implementation of special administrative measures for admission stipulated by the State applies for e-deregistration, the regulatory authority will also raise objections within the period of announcement).
The registration authority shall, within three working days, decide to grant e-deregistration of an enterprise that has not been objected to within the period of the announcement.
The biggest difference in form – between e-deregistration and general deregistration – is that the “Commitment Letter of All Investors” in the e-deregistration replaces the liquidation report, investor resolutions, tax clearance certificates, the filing certificate of the liquidation team, and newspaper samples published in the announcement.
The e-deregistration procedure is obviously faster and more convenient.
Enterprises that meet the applicable conditions can freely choose to apply for e-deregistration or general deregistration. Some enterprises blindly choose e-deregistration to exit the market as soon as possible. However, the principle of “presumption of good faith” contained in e-deregistration may bring certain legal risks to applicants.
The risks brought to the enterprise
The “presumption of good faith” for e-deregistration is reflected in the “Commitment Letter of All Investors” to be submitted for the e-deregistration procedure.
The Commitment Letter is signed by all investors, and it is necessary to make a commitment to the decision of enterprise deregistration, no creditor’s rights and debts, and no unsuitable applied conditions.
If it breaks the law, the registration authority can cancel the deregistration of the enterprise, according to law. While restoring the qualifications of the enterprise as a subject, the enterprise shall be included in the list of serious illegal and untrustworthy enterprises and shall be announced through the National Enterprise Credit Information Publicity System.
This not only prolongs the exit time but also seriously affects the enterprise’s credit record and causes obstacles to general deregistration.