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Unfortunately, like business everywhere, doing business in Chinese mainland is not always a success. Joint ventures can come a cropper for any number of reasons; for example your Chinese partner may not be performing as expected or the business model may not be working out.

What do you do in this situation - abandon your investment?

While the Chinese foreign investment regime contemplates long-term investment and return on capital (rather than capital gain) and thus does not provide for rapid and easy exit strategies, there are a number of options, one of which is liquidation and dissolution. The mainland law on liquidation and dissolution is contained in the Liquidation Procedures for Foreign Investment Enterprises (the Liquidation Law).

Generally the board of a joint venture may decide to liquidate on: (1) the expiry of the term of a joint venture; (2) occurrence of severe losses making continued operations impossible; (3) occurrence of severe losses because of a force majeure event (such as war or a natural disaster); (4) inability to achieve business goals and lack of future development; (5) other reasons, contained in the joint-venture documentation; and (6) the failure of one of the parties to the joint venture to perform its obligations, which results in the joint venture being unable to continue its operations.

If one of the above events occurs then, in the case of (2) - (5), following a unanimous board resolution an application may be made to the authority that approved the joint venture.

In the case of (6), a board resolution is not required; and the party not in breach is entitled to make an application on its own. However, if the breach is not obvious or there is a dispute, then it may be necessary to verify the breach by arbitration or liquidation proceedings first. Generally this means that, apart from cases involving a failure to make capital contributions, arbitration or liquidation proceedings will have to be taken.

Once the approval for the liquidation of the joint venture has been obtained, a liquidation committee should be formed. The liquidation committee is responsible for the conduct of the liquidation, which should not last more than 180 days.

Of course the liquidation involves the realization of the joint ventures' assets and repatriation of the liquidation proceeds to foreign investors.

In sum, foreign enterprises involved in unsuccessful ventures on the mainland have a number of exit strategies. One of them is to liquidate and dissolve the joint venture, which results in the repatriation of the proceeds of the liquidation to the joint-venture partners.

* Temogen Hield is a partner of Coudert Brothers' Hong Kong office and a member of the China Practice Group.

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