The recent issuance of guidelines by four government ministries allows Chinese parties to pursue cross-border foreign investors who flee the country to escape failed business investments and debt.
Hit by a slowdown in manufacturing due to the global downturn, China has seen a number of foreign investors shutter their factories and vanish, leaving behind unpaid workers, unpaid social insurance, unpaid taxes and worried local and national officials.
To prevent this abrupt withdrawal of foreign investment, at the end of 2008 four government ministries – the Ministry of Commerce, Ministry of Foreign Affairs, Ministry of Public Security and Ministry of Justice – jointly issued guidelines snappily entitled “Working Guidelines on Cross-border Pursuit of Liability and Initiation of Legal Action by Relevant Interested Parties in Connection with Abnormal Withdrawal from China of Foreign Investors” to help hunt down runaway foreign investors.
The effect of the new guidelines has no doubt been noticed by China’s foreign investors and their lawyers. Investors are likely to become more cautious when withdrawing now, as doing so in ways that contravene the guidelines could result in being added to an unwritten blacklist preventing further investment in the country. Lawfully dissolving these Chinese companies is now the most attractive solution for foreign investors seeking to repatriate their assets while not jeopardising a future return.
Consulting work sees increase
The government’s determination to stop illegal withdrawals is shown in such guidelines. And the document has sent a warning to foreign investors rather than penalising them.
Investors that have a long-term plan and global ambitions cannot afford to ignore the China market. “The guidelines remind people of the availability of such means, while discouraging foreign investors who are considering the option of abnormal withdrawal,” said Wang Hao, a Beijing-based partner of RayYin & Partners. “But for those which do have difficulties in surviving the crisis, to shut down is the only option. The guidelines lead them to leave legally and bring more consulting work to us.”
Companies in service sectors, especially IT, are in the most difficulty, according to Wang. “Small to mid-sized companies are more vulnerable in the storm than multinational companies that usually have a prudent management system. Most of our consulting work is from them because they usually don’t have sizable in-house teams in charge of legal work.”
Charles Guan, managing partner of Grandall Legal Group’s Shanghai office, said his firm is now helping some Japanese and American clients to shrink the size of their investment, while a few European companies are enquiring about the cost of legal service with regard to withdrawal under the new guidelines. “On the whole, the total volume of work has increased significantly, but the entire value of the work does not increase proportionally - companies considering withdrawal are usually in financial difficulty and so have very limited budgets for legal matters,” he said.
Weary companies in dilemma
Unlike other countries, such as the US and Canada, the dissolution process for a company in China can be complicated and lengthy. No formal statistics detailing the unlawful withdrawal of foreign investment have been available until now. Even so, the issuance of the guidelines has come under fire from both foreign investor circles and lawyers.
“It may take about four to six months for investors who have sound taxation records, and no unpaid wages or debt, to complete the whole withdrawal procedure,” said Qiu Yuxia, managing partner of Deheng (Shandong) in Beijing. “For a troubled company, it is not financially viable to wait such a long period of time. But if the company skips some steps of the procedure, it is very likely that it may be placed on an unwritten blacklist and will find it virtually impossible to invest in China again in the future.”
Some international companies may have already tired of the long withdrawal procedure. Carl Cheng, a partner with Freshfields, said he had a client in such a case. His client, the global CEO of a US-headquartered multinational company, said he would not consider investing in China until the withdrawal procedure is simplified.
Many legal academics think the withdrawal procedure should be shortened. Zhang Jiachun, a partner with Beijing firm East Associates, said: “There is no point in keeping troubled investors in China. Investors who can deal with their problem definitely would prefer to seek formal bankruptcy if they have the choice. Foreign investors may return once the economic climate goes better.”
• In 2007, 87 companies funded by investors from South Korea left the eastern province of Shandong without properly liquidating assets.
• In January 2008, more than 10 Korean company officials abandoned the Yantai Shigang Fiber Co in Shandong and left without paying large debts and the wages of more than 3,000 employees.