Liquidation and Bankruptcy Law in China

27 August 2012 By In Company Setup

Shenzhen liquidation and bankruptcy lawyer

As Chinese economy slows down, many foreign invested companies liquidated their businesses in China. There are many issues to consider and many challenges to face when you are trying to liquidate your business. We are experienced China lawyers experienced in company liquidation matters. You are welcome to contact us for free consultation.

There are of course regulations under Chinese law for how these liquidation processes should properly be carried out to ensure that the company’s final bills are settled, tax is paid, and all the company’s remaining liabilities and statutory responsibilities are correctly discharged.

In this article, we explain the procedures you would need to go through to close a foreign invested enterprise in China, and highlight the many related issues that you will need to address. Under Chinese, there are two laws that specifically govern the bankruptcy of enterprises. One is the Bankruptcy Law of the People's Republic of China (1986), which regulates the bankruptcy of state-owned enterprises (SOE). The other is the Civil Procedure Law of the People's Republic of China (1986), which provides regulations in regard to the bankruptcy of all enterprises with legal person status.


Complementing this legislation, companies established under the Company Law will be governed by the Company Law and Civil Procedure Law. Presently, with the large number of companies (both limited and joint stock) and SOE's undergoing insolvency procedures in China, the Bankruptcy Law (1986) is under review.

A new bankruptcy law is expected to be ratified in the coming few years. In the meantime, to deal with the vast changes in company structures and business environment, the government relies on The Supreme People's Court to pass interpretation on the existing law. These interpretations essentially form the basis of the new bankruptcy laws in China. The latest judicial interpretation defines certain procedures application of the above two current laws.


Bankruptcy, by definition, is the situation where an entity (individual or corporation) is unable to repay his/her debts when and as they fall due. As a result the main drivers of bankruptcy are debt and cash flow. A company must control both of these levers to analyse historical events and predict future requirements. Cashflow analysis is widely used throughout the world for this process.

Such analysis allows companies to appropriately allocate cash between paying operating expenses, purchasing raw materials, replacing plant and equipment, funding growth and, finally, paying debts. Many companies, however, fall into the trap of concentrating on profitability rather than cashflows.

Whilst there is often a strong correlation between these two concepts, there can be significant differences due to timing of cash inflows and outflows and also due to accrual accounting practices. As such, it is important for companies to conduct thorough budgeting processes (using both cash and profit forecasts) to understand possible shortages of cash and when their debts are due. To further aid this process, ratio and financial analysis techniques should be used to present an even more accurate picture of current actual conditions, un-cover and possible problems and predict future development trends.

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