The liquidation path of companies under the new Company Law

2024 05/13

The newly revised Company Law will be implemented on July 1, 2024. The new Company Law adjusts the maximum subscribed capital period for shareholders of limited liability companies to five years, and requires existing companies to gradually adjust to this period. It also stipulates that directors who have not actually paid in capital may bear certain responsibilities; At the same time, the current liquidation system has also been revised, clearly stipulating that directors are the liquidation obligors of the company. Compared to the current provision that shareholders are the liquidation obligors, the liquidation obligation has been implemented to individual directors, which has stimulated the motivation for liquidation. In addition to triggering a wave of capital reduction, the above revisions are expected to also lead to the cancellation of a large number of companies that have not paid in capital or have not actually operated for a long time through liquidation procedures. Under the new Company Law, companies have the following liquidation paths:


1、 Self liquidation


Although the new Company Law stipulates that directors are responsible for the liquidation of the company, according to Article 59 of the new Company Law, the liquidation of the company requires the shareholders' meeting to make a resolution in accordance with the law, and there must be a statutory reason for dissolution before the company can be liquidated. According to Article 229 and Article 232 of the new Company Law, there are four situations in which a company should undergo liquidation: (1) the reasons for dissolution stipulated in the company's articles of association (including the expiration of the business term, etc.) occur; (2) The resolution of the shareholders' meeting to dissolve; (3) The company has its business license revoked, ordered to close down or revoked in accordance with the law; (4) The people's court has ordered the dissolution of the company through a compulsory dissolution lawsuit. Regardless of the above situation, a liquidation team composed of directors (or established in accordance with the company's articles of association or shareholder resolutions) can be established in accordance with the law for liquidation, commonly known as "self liquidation".


2、 Compulsory liquidation


In the event that a liquidation team is not established within the prescribed time limit for liquidation, or if a liquidation team is not established after the establishment of the liquidation team, or if illegal liquidation may seriously harm the interests of creditors or shareholders, creditors, company shareholders, directors, or other interested parties may apply to the people's court through civil litigation to designate relevant personnel to form a liquidation team for liquidation, commonly known as "compulsory liquidation".


In addition, the new Company Law has added a special "compulsory liquidation" situation, which means that if a company is required to undergo liquidation due to the revocation of its business license, order to close or revocation in accordance with the law, the department or company registration authority that made the above decision can also apply to the People's Court to designate relevant personnel to form a liquidation team for liquidation.


The new Company Law does not specify the scope of "relevant personnel" designated by the people's court, but according to the practice of compulsory liquidation, it is usually determined by the people's court by drawing numbers from the list of administrators in enterprise bankruptcy cases.


3、 Bankruptcy liquidation


In addition to self liquidation and compulsory liquidation, the new Company Law also stipulates that if the liquidation team finds that the company's assets are insufficient to repay debts after clearing the company's assets, preparing the balance sheet and property inventory, they shall apply for bankruptcy liquidation to the people's court in accordance with the law. After the people's court accepts the bankruptcy application, the liquidation team shall transfer the liquidation affairs to the bankruptcy administrator designated by the people's court. The people's court and the bankruptcy administrator shall carry out bankruptcy liquidation, settlement or reorganization of the company in accordance with the provisions of the Enterprise Bankruptcy Law.