Member Article

The General Office of the Ministry of Commerce issued the Notice on Transmitting and Issuing the Letter of Reply of the General Office of the State Council on the Issue of the Detailed Applicability of the Capital Contributions of Investors in, and the Liquidation of, Foreign Investment Enterprises ("the Reply") on 18 March 2005. The Reply provides helpful guidance on various issues relating to the capital contributions of parties to equity joint ventures and the liquidation of foreign investment enterprises ("FIEs"). Loan as capital contribution The Several Regulations on the Capital Contributions of the Parties to Sino-foreign Equity Joint Ventures ("Capital Contribution Regulations") require parties which make their capital contribution in cash to use funds owned by themselves. The Capital Contribution Regulations fail to specify whether or not parties may take out loans to make their capital contributions. The Reply clarifies that a party to a joint venture may use funds raised through loans in its own name as its cash contribution. Failure to pay up capital Article 7 of the Capital Contribution Regulations specifies that a party to a joint venture which fails to pay up its capital contribution on time or in full in accordance with the joint venture contract is deemed to have committed a breach of contract. The non-breaching party must then urge the breaching party to make such payment within one month. If the breaching party fails to make the capital contribution, the non-breaching party has a right to apply to the original examination and approval authority to dissolve the joint venture or to approve another joint venture party to replace the breaching party. The Reply states that in practice the original examination and approval authority, when confronted with such an application, has tended to accept that the applicant is the non-breaching party and the other party the breaching party. However, the Reply clarifies that this is a dispute between the parties to a joint venture and that the original examination and approval authority may only make a determination regarding the breaching and non-breaching party on the basis of a valid court judgment or arbitration award. Decision-making power Article 1 of the Supplementary Regulations for the Several Regulations on the Capital Contributions of the Parties to Sino-foreign Equity Joint Ventures ("Supplementary Regulations") provides that a foreign investor who establishes an FIE through the acquisition of assets of, or equity in, a domestic enterprise needs to pay the entire acquisition price within three months after the date of issuance of the business license of the FIE. The Supplementary Regulations further specify that an investor with a controlling interest may not acquire the power to make final decisions in respect of the FIE, and may not include its interest and assets in the enterprise in its own financial statements by the method of consolidated financial statements until it has paid up the entire acquisition price. The Reply clarifies that this "power to make final decisions in respect of the FIE" includes all decision-making powers vested in the capital contributors of the FIE. Timing of liquidation report Article 6 of the Measures for the Liquidation of Foreign Investment Enterprises ("Liquidation Measures") provides that the liquidation period of an FIE, counted from the liquidation commencement date to the date on which the liquidation report is delivered to the examination and approval authority of the FIE, may not exceed 180 days. This period may be extended by up to 90 days upon the approval of the original examination and approval authority of the FIE. The Reply notes that in practice liquidation committees often submit the liquidation report after 180 days or even 270 days without having applied for such an extension. The Reply confirms the validity of such late liquidation reports, provided the rights and interests of the creditors and investors are not harmed. New business Article 7 of the Liquidation Measures prohibits FIEs under liquidation from engaging in new business activities. The Reply clarifies that an FIE may continue to engage in routine business activities during the liquidation period in order to avoid reducing the value an FIE’s assets.