March 01, 2009

Working Guidelines on the Cross-Border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with the Abnormal Withdrawal of Foreign Investment from China

Issuing Body: Issuing Body: Ministry of Commerce, Ministry of Foreign Affairs, Ministry of Public Security and Ministry of Justice
Issuing Date: November 19, 2008
Effective Date:            November 19, 2008

Affected by the global economic recession, a significant number of foreign investors have reportedly withdrawn their investments from China illegally, abandoning them without going through the appropriate legal processes, such as liquidation and deregistration. In the process, those departed companies have left behind outstanding bank loans, unpaid workers, unpaid taxes, unpaid social insurance and other debts. In response, four major Chinese government agencies—the Ministry of Commerce, Ministry of Foreign Affairs, Ministry of Public Security and Ministry of Justice—jointly promulgated the Working Guidelines on the Cross-Border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with the Abnormal Withdrawal of Foreign Investment from China (Working Guidelines) in an effort to halt the illegal ("abnormal") withdrawal of foreign investment and protect so-called "Chinese interested parties."

Perhaps most noteworthy, for foreign investors, is the Working Guidelines' statement that under Chinese law individual investors can in certain circumstances be held liable for the company's debts, such as when the company has failed to meet its legal obligations.

Where any illegal withdrawal of foreign investments occurs, Chinese interested parties are required by the Working Guidelines to apply in a timely manner to the competent authority (a court or criminal investigation bureau) for the establishment of a civil, commercial or criminal case. When necessary, the competent authority can request judicial assistance to prosecute and/or try the case from a corresponding country that is obligated to provide such assistance according to international treaties with China. Such assistance includes, without limitation, the serving of summons and pleadings, evidence collection and seizing relevant property.

If a Chinese party wins an illegal-withdrawal case in a Chinese court, he or it can receive reimbursement from the sale of the losing party's (foreign investor's) property in China. Where no such property is available in China for enforcement of the judgment, the Chinese party may apply to a foreign court with jurisdiction to recognize and enforce the judgment or ruling made by the Chinese court, according to relevant international treaties.

Where any foreign investor fails to go through the appropriate liquidation procedures for a company in which it has invested, resulting in losses to the company's creditors, the Working Guidelines oblige other responsible parties to undertake joint and several liability for repaying the abandoned company's debts. Such responsible parties include any foreign enterprise or foreign individual that is a shareholder of the company when it is a limited liability company; or a controlling shareholder, director or de facto controlling person of the abandoned company when it is a joint stock company.

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