Recently, China’s Supreme Court issued a Judicial Explanation relating to the enforcement of the Company Law of the PRC. The focus of this Explanation is legal responsibility when company liquidation occurs.

Prior to the promulgation of the specific judicial explanation, no detailed regulation regarding company liquidation existed. In fact, shareholders and liquidators could abuse their power during the process of liquidation, including illegally transferring an estate, failing to notify company creditors and cheating the regulatory administration.

Secondly, without the newly promulgated provisions, Chinese Courts and Arbitration Institutions could only make verdicts and awards based on their different, personal, understanding of Company Law and Civil Law, therefore the final conclusions were inconsistent. Certainty within China’s Company Law was hampered and Chinese lawyers specializing in liquidation were left in a confusing state.

Compared with the bankruptcy process, most Chinese companies use liquidation to warp up a business, however, in legal practice the situation is to the contrary as the relevant provisions under Chinese Bankruptcy Law, are far more detailed, and the Company law is far too simple and abstract when liquidation is of concern.