The new Administrative Regulations on the Registration of Market Entities (hereafter the “Regulations”) have been recently promulgated by the State Council and will become effective nationwide as from March 1st, 2022. The Regulations will replace and unify all previous rules and regulations regarding the registration of different types of Market Entities. Market Entities refers to natural persons, legal persons and unincorporated organizations which engage in for profit commercial activities in mainland China.
In this Part II we continue to highlight some of the main innovation which the Regulations are expected to bring about. Please refer to Administrative Regulations on the Registration of Market Entities (Part I) for the first part of this article.
While registering a company in China has become relatively easy, winding up and deregistration has remained cumbersome process which requires several month or sometimes even years of administrative proceedings. The Regulations aim to put an end to this as they provide that a Market Entity may apply for simplified deregistration procedure if it meets the following conditions: i) the Market Entity has completely settled all its creditors’ rights and debts, ii) the Market Entity has paid or settled all costs and expenses in relation to its employees including employee wages, social insurance expenses, statutory compensation, and taxes payable (overdue fees, fines), and iii) all investors of the Market Entity have approved the deregistration and have agreed to assume any legal liability in regard to the conditions for simplified deregistration in a written commitment statement.
To be noted that if the deregistration of the Market Entity is subject to approval according to the law, or if the Business License of the Market Entity has been revoked or canceled or if it is ordered to cease its business by the competent authorities, or if the Market Entity listed in the abnormal entities list, the simplified deregistration procedures will not apply.
The announcement period for simplified deregistration is 20 days against 45 days for the normal deregistration procedure. In practice, it is expected that the simplified procedure should take 7 to 10 working days.
During the pandemic, some Market Entities were forced to stop their operations but still maintained a strong determination to continue their business after the pandemic. With this in mind the Regulations introduced the dormant period.
If a Market Entity suffers business difficulties due to a natural disaster, accident, disaster, public health incident, social security incident, etc., it may decide – at its own discretion – to suspend its business operations for a certain period of time. Before suspending its operations, the Market Entity shall register the dormant period with the registration authority and settle all labor contracts with employees. The start and term of the dormant period and the designated address where the legal documents shall be delivered will be publicized through the national credit information publicity system. The period of business closure shall not exceed three years.
Authenticity of registered content
The Market Entity and the principal directly related to the registration are responsible for the authenticity and legality of the information provided for registration.
The registration authority shall supervise and inspect the registration/recordation items of the Market Entities by randomly selecting inspection targets and randomly selecting and dispatching inspectors. The results of such supervision and inspection shall be disclosed to the public by the authority.
Any natural persons, legal persons or other organizations affected by the false market entity registration information may apply to the registration authority for cancelation of the relevant registration. After accepting the application, the registration authority shall promptly conduct an investigation. If the registration authority determines, after investigation, that there is indeed false information registered, it shall cancel the registration of such Market Entity. In case the Market Entity and its personnel cannot be contacted or refuse to cooperate with the investigation, the registration authority may publicize the registration in the national credit information publicity system for a period of 45 days. If no objection is raised by the Market Entity or by other interested parties during the announcement period, the registration authority may cancel the false registration.
If a Market Entity is found to provide false information for registration or adopting other fraudulent means to conceal important facts information, the registration authority shall order it to make corrections, confiscate its illegal gains, and fine it CNY50,000 to CNY1 million or even revoke its business license. The main principal of such Market Entity may moreover face fines or other sanctions.
What to expect in general?
It is already clear that the Regulations will bring about a real shift in regard to the registration of legal entities and the administrative management of such legal entity. Clearly the role of the registration authority is being streamlined and, to some extent, limited. However the responsibility of the principals operating the Market Entity is made more specific and their liability is increased. Neglecting the proper administration of the Market Entity’s registration will have consequences for the individuals who are made responsible for such Market Entity (typically the legal representative or the general manager for instance) which means that there will be a need for much closer scrutiny of such registration administration.
The draft of the implementation rules relative to the Regulations are currently under consultation period. These rules will provide more specific content and practical form to the provisions of the Regulations. We will keep you informed as soon as they become available of course.