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China Foreign Investment in China Human Resources What Should Chinese Insolvent Companies Do When Unable to Pay Salary and Compensation?
KNOWLEDGE|
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Voluntary Liquidation |
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In the case of insolvency, prior to applying for bankruptcy procedure, the company can consider whether it will be able to go through the cancellation procedure to be locked down. Before applying for cancellation, a liquidation group shall be formed to clear up the company’s assets and liabilities, including the recovery of creditor’s rights and the repayment of debts, the payment of employee’s wages and economic compensation, and the termination of labor relations. The company shall arrange to issue a cancellation announcement and a liquidation report as well as handle the cancellation procedures with Ministry of Commerce, State Taxation Bureau and other departments. Pursuant to Article 44 (5) of the Labor Contract Law “A labor contract may be terminated if the employer makes a decision to liquidate its business ahead of the schedule” and Article 46 (6) “The employer shall pay the employee an economic compensation if the labor contract is terminated according to Article 44 (5) of this Law”. However, since the company’s book assets are unable to repay the company’s debts and pay employees’ wages and economic compensation at this time, the company shall consider to raise the funds from shareholders to repay the debts, or both parties negotiate to cancel all or part of the debts so as to cancel the debt right and debt relationship through consultation with creditors and labor contract relationship after reaching an agreement with employees. The company can only handle the subsequent cancellation procedures if it clears up and voluntarily cancels these claims, debts and labor relations. |
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Bankrupt Liquidation |
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According to the Law, when the company is insolvent or unable to pay off its debts as due, the creditors, debtors and the liquidation group of the company is entitled or should apply with the people’s court for bankrupt liquidation: (1) In accordance with Article 2 of Enterprise Bankruptcy Law “Where an enterprise legal person fails to clear off its debt as due, and if its assets are not enough to pay off all the debts or if it is obviously incapable of clearing off its debts, its liabilities shall be liquidated according to the provisions of the present Law. In accordance with Article 7 “Where a debtor is under the circumstance as prescribed by Article 2 of the present Law, it may file an application with the people’s court for revival, compromise or bankrupt liquidation. Where the debtor fails to pay off its due debts, it may file an application with the people’s court for revival or bankrupt liquidation. Where an enterprise legal person has been dissolved without any liquidation or without completing the liquidation and if the relevant assets are not enough to clear off the debts, the person liable for liquidation shall apply with the people’s court for bankrupt liquidation”. (2) According to Article 187 of Company Law “If the liquidation group finds that the properties of the company is not sufficient for paying off the debts after liquidating the properties of the company and producing balance sheets and checklists of properties, it shall file an application with the people's court for bankruptcy. Once the people’s court makes a ruling declaring the company bankrupt, the liquidation group shall hand over the liquidation matters to the people’s court”. Where a company declared bankrupt, the labor employment relationship between the company and its employees will be terminated naturally. In accordance to Article 44 (4) of the Labor Contract Law “A labor contract may be terminated if the employer is declared bankrupt” and Article 46 (6) “The employer shall pay the employee an economic compensation if the labor contract is terminated according to Article 44 (4) of this Law”. Once a company applied for bankrupt liquidation, in accordance with Article 113 of Enterprise Bankruptcy Law, after the costs for bankruptcy proceedings and community liabilities are repaid in priority, shall liquidate the wages and subsidies for medical treatment and disability, comfort and compensatory expenses as defaulted by the bankrupt, the fundamental old-age insurance premiums, fundamental medical insurance premiums that shall have been transferred to the employees' personal account as well as the compensation for employees as prescribed by the relevant laws and administrative regulations. However, in practice, once applied for bankrupt liquidation, the bankrupt enterprise often fails to pay the entire salary and the financial compensation to the employees. In accordance with Article 120 of Enterprise Bankruptcy Law, in the case of no asset for the bankrupt to distribute, the relevant bankruptcy administrator shall request the people’s court to terminate the procedures for bankruptcy. When the procedures for bankruptcy are concluded, a bankruptcy administrator can handle the formalities for write-off in the organ as originally in charge of the registration of the bankrupt upon the strength of the decision of the people's court on concluding the procedures for bankruptcy. As the result, the subject qualification of the company no longer exists, the debt, employee’s salary and economic compensation no longer need to be paid off, and the company no longer bears any responsibilities for its demise. In respect with the shareholders, the shareholders of a limited liability company shall bear limited liability for the company’s debts. The company’s debts shall be paid off with all the company’s assets, and the shareholders shall bear limited liability to the extent of their subscribed capital contributions. In other words, as long as the shareholders fulfill the obligation of capital contribution and the company’s debts are not paid off in whole or in part after the bankruptcy proceedings, the shareholders do not have the complementary obligations. Unless the abuse of shareholder status damages the interests of creditors, shareholders may bear joint and several responsibility. In respect of the employees, since the company has applied for bankruptcy procedure and increased the bankruptcy expenses, the order of compensation for this part of bankruptcy expenses takes precedence over employees’ salary and financial compensation, that directly reduces the probability of employees getting full or partial repayment. Compared with the cancellation procedure under voluntary liquidation, if the company has surplus assets and the employees can negotiate with the enterprise until an agreement is reached, there is no limitation on the order of compensation, the possibility and proportion of employees’ compensation may be increased. In respect of the management of the company, Article 125 of the Enterprise Bankruptcy Law stipulates that where a director, supervisor or senior manager violates his obligations of being honest and diligent and thus leads to enterprise bankruptcy, he may not, within 3 years as of the day when the procedures for bankruptcy are concluded, assume the post of director, supervisor or senior manager. |
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Financial Compensation Standard |
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According to the above-mentioned Laws, the company shall pay salary and financial compensation to its employees whether the company is liquidated voluntarily or applied for bankruptcy. In accordance with Article 47 of Labor Contract Law, the calculation standard of financial compensation is as follows:
(1) An employee shall be given a financial compensation based on the number of years he has worked for the employer and at the rate of one month’s wage for each full year he worked. Any period of not less than six months but less than one year shall be counted as one year. The financial compensations payable to an employee for any period of less than six months shall be one-half of his monthly wages. (2) If the monthly wage of an employee is higher than three times the average monthly wage of the employees declared by the people’s government at the level of municipality directly under the central government or at the level of a districted city where the employer is located, the rate for the financial compensation to be paid to him shall be three timed the average monthly wage of employees and shall be no more than 12 years of work. (3) The term of “monthly wage” refers to the employee’s average monthly wage for the 12 months prior to the dissolution or termination of his labor contract. Generally speaking, whether an enterprise decided to be closed down by the voluntary liquidation or the bankrupt liquidation, it shall solve the problem of employees’ salary payment and legally terminate the labor relationship with employees. Whether the enterprise chooses to negotiate with the employees or raise funds from the outside to repay the employees’ back pay to complete the company cancellation, or choose to pay off the employees’ wages by the property which left after bankruptcy, Kaizen suggests that both enterprise and employees should measure and consider the actual situation before making any decision. |
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Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage. |
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