China question: What are the liabilities for a failed WFOE?
June 01, 2012 | BY
clpstaff &clp articlesThe economic slowdown has caused many WFOEs to shut down leaving bad debt. Under Chinese law, what are the liabilities for managers, directors and the shareholders?
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The domestic perspective
Under PRC law, if a wholly foreign-owned enterprise (WFOE) is unable to repay its debts, and the WFOE's assets are insufficient to settle all its debts, bankruptcy proceedings may be initiated. The WFOE may file for bankruptcy by itself, or a creditor of the WFOE may file for bankruptcy. The directors, senior managers and shareholders may assume liabilities.
Directors and senior managers
Under the PRC Enterprise Bankruptcy Law (中华人民共和国企业破产法), if a WFOE is bankrupted because the directors, supervisors or senior managers violate loyalty or diligence duties, they assume civil liabilities and cannot work in that capacity at any other enterprises for three years from the date bankruptcy procedures are completed.
The PRC Company Law (中华人民共和国公司法) sets out detailed provisions over loyalty and diligence duties of directors and senior managers. According to the Law, directors,