In the early 1990's, encouraged by the Chinese government, foreign investors flocked to China in the hope that it would provide a cheap source of skilled labour and/or a potential huge market. The kind of business enterprises set up in China are often set up in the following three ways and are collectively known as Foreign Investment Enterprises (FIEs):
　 　

The number of PRC Registered Foreign － Funded Enterprises has increased significantly from 37,000 in 1991 to 227,000 in 2003 and the number of foreign registered capital has increased from US$26 billion to US$466 billion in 2003. The changes over last twelve years can be illustrated in the following table:

The majority of the earlier and smaller FIEs were not successful and were forced to close down or be disposed of. In most cases, both the shareholders and creditors of these FIEs decided to cut their losses and walk away, abandoning their investment. This behaviour was accepted in dealings with FIEs and SOEs, as formal bankruptcy of enterprises in the PRC was extremely rare at that time. This phenomenon continued for some years. The majority of FIEs that failed and were forced to close tended to be the smaller ones. Larger FIEs with "deep pocket" foreign investors were both financially able and willing to sustain the losses incurred, as they were looking for medium to long term returns on their investments in China, rather than short term gain.

However, after prolonged and continued initial losses, even the larger foreign investment enterprises felt that the situation was no longer tolerable and that there had to be a stop to any further loss of funds. As these larger foreign investment partners had internal compliance and regulatory procedures to follow, they could not simply walk away from the failed PRC FIE investments like their smaller counterparts did. In addition, these large foreign investors would not wish to see their names in association with any insolvent or abandoned FIEs that had not been properly and formally closed down.

The Foreign Investment Enterprises Liquidation Procedures
Prior to 1996, the dissolution and liquidation of FIEs was governed by their respective laws and implementing rules. Local and regional legislation dealing with the liquidation of FIEs in various major cities and Special Economic Zones was passed. However, these laws were not widely enforced.

The Foreign Investment Enterprises Liquidation Procedures 外商投資企業清算辦法 (the 1996 Procedures) came into being in 1996. This was the first piece of legislation to regulate the liquidation and dissolution procedures of FIEs in China. It was promulgated by the Ministry of Foreign Trade and Economic Cooperation and became effective on 9 July 1996.

The 1996 Procedures, as set out in Article 2, principally apply to the liquidation and dissolution of FIEs that are "solvent".

Commencement of liquidation
Generally, an Enterprise may be liquidated and dissolved when (under Article 5 － 1996 Procedures):

Types of liquidation － ordinary or special?
If the shareholders/joint venture partners of the Enterprise can agree on the formation of the liquidation committee and no major issues are expected to remain unresolved in the course of the liquidation, the liquidation may proceed as an Ordinary Liquidation 普通清算. Otherwise, the liquidation will have to commence as a Special Liquidation 特別清算, in which case approval from the relevant Authorisation Body or the Court is required (Article 3 － 1996 Procedures).

Liquidation Committee － under Ordinary Liquidation
The liquidation process is not overseen by an individual Liquidator. Instead, a liquidation committee is formed within 15 days from the commencement of liquidation to take charge of the liquidation process. Members of this committee are drawn from the directors and shareholders/partners of the Enterprise (or their representatives) (Article 8 － 1996 Procedures).

The liquidation committee is supervised by the Enterprise's Authorisation Body. The Authorisation Body may select and appoint a minimum of three members of the liquidation committee from amongst the owners of the enterprise or engage professionals to 6 Procsit on the committee. The chairman of the liquidation committee shall be appointed by the Authorisation Body (Article 9 － 1996 Procedures).

If the Enterprise is found to be unable to pay its debts in full, i.e. is insolvent, the liquidation committee shall apply to the Court immediately to declare the Enterprise to be bankrupt and the matter will then be dealt with according to the bankruptcy laws (Article 27 － 1996 Procedures).

All books, records, vouchers, ledgers etc. of the Enterprise must be retained by the PRC JV shareholders/partners for Sino-foreign Equity Joint Ventures and Sino-foreign Cooperation Joint Ventures, or the Examination and Approval Authority for wholly foreign-owned enterprises. They may not be removed from the PRC (Article 34 － 1996  Procedures).

The procedures for FIEs under "Ordinary" liquidation are not going to be discussed in detail here, but the two key procedures in relation to "commencement and notification to creditors" and "closing" may be briefly summarised in the above two charts.

For more information, please contact Alison Wong at +852 2218 3037 (alison.wong@gthk.com.hk), Christina Lam at +852 2218 3034 (christina.lam@gthk.com.hk), Anita Hou at +852 2218 3063 (anita.hou@gthk.com.hk) or Anita So at +852 2218 3018 (anita.so@gthk.com.hk)