Chinese authorities issued the Working Guidelines regarding Cross-border Pursuit of Liability and Initiation of Legal Action in Connection with Illegal Withdrawal of Foreign Investments from China (the “Guidelines"), effective from November 19th, 2008. Judicial assistance treaties already signed between China and foreign nations grant overseas courts jurisdiction over matters of civil or criminal actions committed in violation of PRC laws. The Guidelines, which further elaborate on these treaties, could become a powerful tool in enhancing corporate accountability and will make one think twice before making a run for the border.
What Actions Garner Liability?
Abnormal/premature withdrawal of foreign capital includes:
§ Tax evasion of a considerable sum (the Guidelines do not specify an amount);
§ Failure to complete liquidation procedures with creditors resulting in damages; or
§ Others specified by law.
Who May be Held Accountable?
According to the PRC Company Law, the following parties will be held jointly and severally liable for the above violations:
§ Shareholders of limited liability companies;
§ Controlling shareholders and directors of joint stock companies; and
§ The foreign enterprise or individual that is in ‘actual control’ whether through investment, agreement or other arrangements with the company (e.g., parent company).
How is a Judgement Enforced?
(i) Aggrieved Chinese party registers offence with relevant local judicial authorities.
What Actions Garner Liability?
Abnormal/premature withdrawal of foreign capital includes:
§ Tax evasion of a considerable sum (the Guidelines do not specify an amount);
§ Failure to complete liquidation procedures with creditors resulting in damages; or
§ Others specified by law.
Who May be Held Accountable?
According to the PRC Company Law, the following parties will be held jointly and severally liable for the above violations:
§ Shareholders of limited liability companies;
§ Controlling shareholders and directors of joint stock companies; and
§ The foreign enterprise or individual that is in ‘actual control’ whether through investment, agreement or other arrangements with the company (e.g., parent company).
How is a Judgement Enforced?
(i) Aggrieved Chinese party registers offence with relevant local judicial authorities.
(ii) After the Chinese party wins in a Chinese court, if the foreign party defendant has no enforceable property in China, the Chinese party may request that foreign courts with jurisdiction where the defendant’s property and assets are located to acknowledge and enforce the judgements.
(iii) Chinese authorities, in accordance with the treaties, may contact foreign authorities for assistance regarding matters such as: service of judicial documents, obtaining evidence, investigation of personnel and capital/funds, search and seizure of property.
(iv) In Civil suits, Chinese nationals are afforded the same rights as nationals of the overseas jurisdictions where judgement is sought. Further, those suffering financial hardship may also apply for legal aid according to the laws of the country where they file suit.
(v) China has extradition treaties for serious cases involving malicious tax evasion.
