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What Happens to My Debts When a Chinese Company Is Dissolved or Goes Bankrupt? - CTD 101 Series

Tue, 14 Dec 2021
Contributors: Meng Yu 余萌
Editor: C. J. Observer

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You can claim debt recovery from its shareholders.

Normally, due to the very nature of companies (legal persons), it is very difficult for you to claim debt recovery from a Chinese company’s shareholders.

Once the company is canceled, however, you will have opportunities to do so.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection.

There are two ways to cancel a Chinese company. One is cancellation after dissolution, which will be applied when the company’s assets are more than its debts, and the other is cancellation after bankruptcy, which will be applied when the company’s debts are more than its assets.

Your chances of recovering the debts are different under the two different types of cancellations.

1. Cancellation after dissolution: good chances of recovering the debts

If a Chinese company is dissolved and canceled before you are repaid, you may have a claim against the liquidation group responsible for the dissolution and cancellation of the company.

The members of the liquidation group are usually the shareholders of the company. Therefore, you may claim debt recovery from the shareholders.

Specifically, a Chinese company should be liquidated before its dissolution and cancellation. The liquidation is carried out by the liquidation group.

The liquidation group shall notify all the known creditors of the dissolution of the company in writing and publish an announcement in the newspaper.

Where the liquidation group fails to notify you and consequently causes you, as a creditor, to fail to declare all your creditor’s rights in a timely manner and fail to receive the repayment, you may hold the members of the liquidation group liable for compensation for the loss incurred.

In other words, if you find out that a Chinese company has been canceled without notifying you, you can claim debt recovery from its shareholders.

Normally, shareholders, especially individual shareholders, will have some assets, at least some savings or properties, which can be used for repayment.

2. Cancellation after bankruptcy: little chance of recovering the debts

If a Chinese company goes bankrupt and is canceled before you are repaid, there is little chance that you will collect the debts.

When a Chinese company goes bankrupt, its bankruptcy administrator will notify its known creditors and publish an announcement in a Chinese newspaper to notify unknown creditors.

If you fail to declare all your creditor’s rights to the bankruptcy administrator within the time limit (usually within three months after the official announcement) and do not declare such creditor’s rights before the final distribution of the bankruptcy property, you cannot request the company to make any repayment.

In fact, you will probably miss the bankruptcy announcement in the Chinese newspapers. If the bankruptcy administrator does not realize your creditor’s rights either, you will miss your last chance.

Thankfully, however, most Chinese companies will choose to dissolve rather than go bankrupt for cancellation, even if they do have “more debts than assets”.

Because bankruptcy is more expensive and lengthier, most companies prefer to be dissolved with hidden debts rather than go bankrupt.

For example, according to China’s Supreme People’s Court, 59,604 bankruptcies were filed in Chinese courts between 2007 and 2020, an average of just over 3,000 bankruptcies per year.

By contrast, at the end of 2019, the number of companies in China was 38,583 million, including 7,391 million new companies in 2019.

Compared to the huge number of companies, the number of company bankruptcies is really negligible.

This somehow proves our speculation that most Chinese companies will choose dissolution rather than bankruptcy for cancellation.

If the company chooses cancellation after dissolution, you may have the chance to claim debt recovery from its shareholders.

 

The Cross-border Trade Dispute 101 Series (‘CTD 101 Series’) provides an introduction to China-related cross-border trade dispute, and covers the knowledge essential to cross-border trade dispute resolution and debt collection.

 

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(1) Trade Dispute Resolution
(2) Debt Collection
(3) Judgments and Awards Collection
(4) Anti-Counterfeiting & IP Protection
(5) Company Verification and Due Diligence
(6) Trade Contract Drafting and Review

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Photo by Max Zhang on Unsplash

Contributors: Meng Yu 余萌

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