In recent years, some areas in China have witnessed an increase in irregular withdrawals by foreign-invested enterprises. To address the problems these irregular withdrawals have caused and prevent their future occurrences, four departments of China’s central government issued a set of guidelines on November 19, 2008, on how to conduct relevant investigations and bring appropriate lawsuits.
The guidelines, entitled the Guidelines on Chinese Parties’ Cross-Border Investigations of and Litigation against Irregular Withdrawals of Foreign Capital, were jointly issued by the general offices of China’s Ministry of Commerce, Ministry of Foreign Affairs, Ministry of Justice, and Ministry of Public Security.
Irregular withdrawals of foreign capital occur when foreign investors leave China without properly liquidating their foreign-invested enterprises established in China or without filing for bankruptcy through the appropriate legal procedures. Irregular withdrawals often leave Chinese creditors with bad debts, its Chinese partners with a troubled company and its former employees with unemployment, among other issues.
The Guidelines focus on providing practical guidance for victimized Chinese parties to seek crossborder legal remedies. The Guidelines point out that China has entered into many bilateral treaties with different nations on mutual judicial assistance in civil and commercial matters, criminal matters, and extradition matters, that serve as the legal basis for the handling of disputes resulting from irregular foreign-capital withdrawals.
According to the Guidelines, after the occurrence of an irregular withdrawal of foreign capital, the Chinese parties involved should file a civil, commercial or criminal case with the appropriate court or public security department in charge, which may request judicial assistance from the foreign nations with which China has signed the bilateral treaties on judicial assistance. The foreign signatories are bound by the treaties to provide the Chinese parties with judicial assistance, which includes serving judicial documents, collecting relevant evidence, and assisting with the investigation of the parties and funds involved.
The Guidelines point out that if the Chinese parties involved prevail in a civil case in Chinese courts, and no asset of the losing foreign party that would satisfy the judgment is available, the prevailing party may, under the bilateral treaties or the laws of the foreign party’s jurisdiction, request the competent foreign courts to acknowledge and enforce the decision or ruling made by the Chinese court.
The Guidelines also point out ways to protect the creditors suffering from the absence of a normal liquidation procedure. Under Chinese law, foreign enterprises or individuals, who are equity holders of a limited liability company, the controlling equity holders and directors of a company limited by shares, or the actual controlling persons of a company, are subject to civil liabilities, and they are jointly liable for company debts. In addition, the relevant bilateral treaties also bestow Chinese citizens with equal litigation rights as citizens of the relevant foreign country, thus Chinese creditors may file lawsuits in foreign courts to recover damages.
In the case of a substantial tax avoidance, which constitutes a criminal conduct, the relevant government agencies in China may first open a case, and then file an extradition request or a criminal litigation transfer request with the criminal suspect’s destination country in accordance with relevant treaties.
The increase in the occurrences of irregular withdrawals of foreign capital from China in recent years is due to many of the economic, financial and policy changes that have taken place in recent years. Mainly, the increase is due to the industrial structure upgrading in China, which has been less favorable for some low-technology, labor intensive enterprises, and the recent financial crisis, which has caused many investors to reconsider their production and investment strategies and shut down their enterprises in China or leave China. More specific reasons may include the appreciation of the value of China’s official currency, the Renminbi; the tax reform that reduced the preferential treatment of foreign invested enterprises and the export tax refund; the increase in the cost of labor due to the Labor Contract Law, effective since January 1, 2008; and the increase in production costs due to price increases and stricter measures on environmental protection in China.