After calculating the properties of a company, then the next question is how to pay off its debts? Can individual creditors have preferential to others? When will be the company’s properties distributed to its shareholders?
Firstly, provision of Section 185 provides that: the rights and liability of liquidation committee are "(2) serve notice to creditors", "(4) pay all outstanding taxes and taxes incurred in the process of liquidation", "(5) settle ...... debts" etc.
Section 186 provides that: the liquidation committee shall, within ten days since its formation, served notice to creditors, and shall within sixty days, make announcement in a newspaper. The creditors shall, from the date of receipt of the notice, within thirty days, or upon the announcement publish, within 45 days, in the case no notice is received, declare their claims to the liquidation committee. The claims should includes the matters about he debts, explain and provide supporting materials. The liquidation committee shall register the claims. During the reporting creditor, the liquidation committee shall be settled on the creditor.
Registration of claims is for the purpose of settlement and for co-ordination and arrangement. At this point, the prior priority of settlement debts of certain individual is unfair to other creditors.
Secondly, provision of section 185 provides that, the rights and liability of liquidation committee": (4) pay all outstanding taxes and taxes incurred in the liquidation process" (5) ....... debt settlement","(6) handling the remaining properties after all debts has been settled".
Section 187 provides: when the liquidation committee handling the company’s properties, it will prepare a balance sheet and an inventory control, formulate a liquidation plan and table it at the shareholders' meeting, general meeting or the court to seek approval.
The company’s properties will be used for paying the liquidation expenses, staff wages, social insurance premiums and legal compensation, outstanding taxes and debts. For the remaining assets, in case of a limited liability company, it will be reallocated in accordance with the shareholder's pro rata contribution. For shares limited company, it will be reallocated according to the number of shares held by the shareholders.
During the liquidation period, the company continues to exist. But it cannot engage in business activity which is outside the scope of liquidation. Properties which have not been settled as mentioned before cannot be distributed to shareholders.
Among them, the liquidation expenses mean the cost of expenses for liquidation, such as stock take, maintenance, evaluation, disposition fees, announcements, litigation costs, staff salaries settlement and so on. The statutory compensation for workers should be in accordance with the Labor Law, the Company terminates the labor contract and it should be compensate the workers.
S.189 provides that: After the liquidation, the liquidation committee shall prepare a liquidation report, table it at the shareholders' meeting, general meeting or the Court for confirmation and submit the same to the company’s registration authority for cancellation of the company’s registration.
"Company Law" Article 188 stipulates: if the liquidation committee, during preparing the balance sheet and the inventory list, notes that the company’s assets are insufficient to repay the debts, it shall apply to the court for a declaration of bankruptcy.
Upon the court rules that the company was declared bankruptcy, the liquidation committee shall hand over the liquidation matters to the Court.
S.191 provides that: upon the company is declared bankrupt, it will implement in accordance with relevant laws about corporate bankruptcy to liquidate. Currently, in China, the "PRC Enterprise Bankruptcy Law" is the basic principal for company's liquidation.
What is more, "Supreme People's Court on the application of the "Company Law" provisions apply to several issues (2), Article 17: the liquidation committee when preparing the balance sheet and the inventory control, notes that if the company property is insufficient to repay the debt, they can negotiate with creditors for re-arrangement on debt settlement.
The debt re-arrangement program must be recognized by all creditors without prejudice to the interests of other stakeholders. The court will make a final decision according to the application of liquidation committee. The liquidation committee, according to the debt re-arrangement program, shall apply to the court for ruling to the liquidation proceedings.
The debt re-arrangement program, if not agreed by creditors or recognized by the Court, the liquidation committee shall apply to the court for a declaration of bankruptcy.