PRC, Wholly Individually-owned Enterprises Law

Ref no: 2130/1999.08.30

(Promulgated on 30 August 1999, and effective as of 1 January 2000.)

PART ONE: GENERAL PROVISIONS

Article 1: This Law has been formulated in accordance with the Constitution in order to standardize the acts of wholly individually-owned enterprises, protect the lawful rights and interests of the investors in and creditors of wholly individually-owned enterprises, safeguard social and economic order and promote the development of the socialist market economy.

Article 2: For the purposes of this Law, the term "wholly individually-owned enterprise" refers to a business entity established in China in accordance with this Law that is invested in by a single natural person, the property of which is owned by the investor personally, and for the debts of which the investor assumes unlimited liability with his personal property.

Article 3: The principal administrative establishment of a wholly individually-owned enterprise shall be its domicile.

Article 4: While engaging in business activities, a wholly individually-owned enterprise must abide by laws and administrative regulations and adhere to the principle of good faith, and may not harm the public interest.

A wholly individually-owned enterprise shall perform its tax obligations in accordance with the law.

Article 5: The State protects the property and the other lawful rights and interests of wholly individually-owned enterprises in accordance with the law.

Article 6: A wholly individually-owned enterprise shall recruit and employ staff and workers in accordance with the law. The lawful rights and interests of staff and workers are protected by law.

The staff and workers of a wholly individually-owned enterprise shall establish a labour union in accordance with the law and the union shall carry out its activities in accordance with the law.

Article 7: Communist Party of China members in wholly individually-owned enterprises shall carry out their activities in accordance with the charter of the Communist Party of China.

PART TWO: ESTABLISHMENT OF WHOLLY INDIVIDUALLY-OWNED ENTERPRISES

Article 8: To establish a wholly individually-owned enterprise the following conditions shall be met:

1. the investor shall be a natural person;

2. the enterprise shall have a lawful enterprise name;

3. the enterprise shall have the capital contribution declared by the investor;

4. the enterprise shall have a fixed place of production and business, and the conditions necessary for its production and business shall exist; and

5. the enterprise shall have the necessary working personnel.

Article 9: When applying to establish a wholly individually-owned enterprise, the investor or his appointed agent shall submit an application for establishment, the investor's identification papers, proof of the use of production and business premises to the registration authorities of the place where the wholly individually-owned enterprise is to be located. If an agent is appointed to apply for establishment registration, the agent shall produce the power of attorney issued by the investor and lawful certification in respect of the agent.

A wholly individually-owned enterprise may not engage in business prohibited by laws or administrative regulations. If the wholly individually-owned enterprise is to engage in business which laws or administrative regulations require to be submitted to the relevant authorities for examination and approval, the approval documents issued by the relevant authorities shall be submitted when applying for establishment registration.

Article 10: The application for the establishment of a wholly individually-owned enterprise shall specify the following matters:

1. the name and domicile of the enterprise;

2. the name and residence of the investor;

3. the amount of capital contributed by the investor and the method of contribution; and

4. the scope of business.

Article 11: The name of a wholly individually-owned enterprise shall be in agreement with the enterprise's form of liability and the business engaged in.

Article 12: The registration authorities shall grant registration and issue a business licence to those wholly individually-owned enterprises which meet the conditions stipulated herein within 15 days of receiving the application documents for establishment. If a wholly individually-owned enterprise fails to meet the conditions stipulated herein, the registration authorities shall deny registration and issue a written reply explaining the reason.

Article 13: The date the business licence of a wholly individually-owned enterprise is issued shall be the date the wholly individually-owned enterprise is established.

Before obtaining a business licence for a wholly individually-owned enterprise, the investor may not engage in business activities in the name of the wholly individually-owned enterprise.

Article 14: To establish a branch of a wholly individually-owned enterprise, the investor or his appointed agent shall apply for registration with the registration authorities of the place where the branch is to be located and obtain a business licence.

After the application has been approved and the branch has been registered, the registered particulars shall be reported to the registration authorities of the wholly individually-owned enterprise to which the branch belongs, for the record.

Civil liability for the branch shall be borne by the wholly individually-owned enterprise which established it.

Article 15: If a change occurs in the registered particulars of a wholly individually-owned enterprise during the existence of the enterprise, application for modification of registration shall be made to the registration authorities in accordance with the law within 15 days of the date on which the decision to make the change was made.

PART THREE: ADMINISTRATION OF THE INVESTORS IN AND AFFAIRS OF WHOLLY INDIVIDUALLY-OWNED ENTERPRISES

Article 16: Persons whom laws and administrative regulations prohibit from engaging in profit-making activities may not apply to establish a wholly individually-owned enterprise as an investor.

Article 17: The investor in a wholly individually-owned enterprise is the legal owner of the property of his enterprise and may assign or pass down his relevant rights in accordance with the law.

Article 18: If an investor applying to register the establishment of a wholly individually-owned enterprise specifies in his application that he is using the common property of his household as his individual capital contribution, he shall legally assume unlimited liability for the debts of the enterprise with the common property of his household.

Article 19: The investor in a wholly individually-owned enterprise may manage the affairs of the enterprise himself, or appoint or employ another person with capacity for civil acts to take charge of managing the affairs of the enterprise.

If the investor appoints or employs another person to manage the affairs of the wholly individually-owned enterprise, he shall execute a written contract with the person appointed or employed. The contract shall specify the specific details of the appointment and the extent of the delegated authority.

The person appointed or employed shall perform his fiduciary obligation, and take charge of managing the affairs of the wholly individually-owned enterprise in accordance with the contract executed with the investor.

The restrictions placed on the powers of the person appointed or employed may not be used to oppose a bona fide third party.

Article 20: The person appointed or employed by the investor to manage the affairs of the wholly individually-owned enterprise may not:

1. use the advantages of his position to solicit or accept bribes;

2. use the advantages of his position or work to appropriate enterprise property;

3. divert enterprise funds for his own use or to loan to another person;

4. open an account in his own name or another person's name and deposit enterprise funds therein without authorization;

5. offer enterprise property as security without authorization;

6. engage in business which competes with the enterprise, without the consent of the investor;

7. enter into a contract with the enterprise or conduct transactions with it, without the consent of the investor;

8. assign a trademark or other intellectual property of the enterprise to a third party for its use, without the consent of the investor;

9. disclose trade secrets of the enterprise; or

10. other acts prohibited by laws or administrative regulations.

Article 21: A wholly individually-owned enterprise shall maintain account books and keep accounts.

Article 22: A wholly individually-owned enterprise which recruits and employs staff and workers shall execute labour contracts with its staff and workers in accordance with the law, ensure the labour safety of its staff and workers and pay its staff and workers' wages on time and in full.

Article 23: A wholly individually-owned enterprise shall join social insurance in accordance with State regulations and contribute social insurance premiums for its staff and workers.

Article 24: A wholly individually-owned enterprise may legally apply for loans, obtain leasehold and enjoy other rights stipulated in laws and administrative regulations.

Article 25: No work unit or individual may forcibly requisition financial, material or labour resources by any means from a wholly individually-owned enterprise in violation of laws or administrative regulations. A wholly individually-owned enterprise has the right to refuse the illegal forced requisitioning of financial, material or labour resources.

PART FOUR: DISSOLUTION AND LIQUIDATION OF WHOLLY INDIVIDUALLY-OWNED ENTERPRISES

Article 26: A wholly individually-owned enterprise shall be dissolved if:

1. the investor decides to dissolve it;

2. the investor dies, or is declared dead, and has left no heir or his heir decides to repudiate the inheritance;

3. its business licence is revoked in accordance with the law; or

4. there are other circumstances stipulated in laws or administrative regulations.

Article 27: When a wholly individually-owned enterprise is dissolved, liquidation shall be carried out by the investor himself or by a liquidator appointed by the People's Court on the application of a creditor.

If the investor conducts the liquidation himself, he shall notify his creditors in writing 15 days before the liquidation or, if it is impossible to notify them, make a public announcement. Creditors shall declare their claims to the investor within 30 days of the date of receipt of the notification or, if they failed to receive notification, within 60 days of the date of the public announcement.

Article 28: After a wholly individually-owned enterprise is dissolved, the original investor shall continue to bear liability to pay the debts incurred during the existence of the wholly individually-owned enterprise. However, if a creditor fails to demand payment within five years, the liability shall be extinguished.

Article 29: When a wholly individually-owned enterprise is dissolved, its property shall be used for payment according to the following order:

1. outstanding staff and worker wages and social insurance premiums;

2. outstanding taxes;

3. other debts.

Article 30: During liquidation, a wholly individually-owned enterprise may not conduct business activities unrelated to the liquidation. The investor may not transfer or conceal property before the full payment of debts as stipulated in the preceding Article.

Article 31: If the property of a wholly individually-owned enterprise is insufficient to pay its debts in full, the investor shall use his other personal property to pay the debts.

Article 32: After the liquidation of a wholly individually-owned enterprise is completed, the investor or the People's Court appointed liquidator shall compile a liquidation report and within 15 days carry out de-registration procedures with the registration authorities.

PART FIVE: LEGAL LIABILITY

Article 33: If enterprise registration is obtained by the submission of sham documents, or the employment of other fraudulent means in violation of the provisions hereof, a rectification order shall be issued and a fine of Rmb 5,000 or less shall be imposed. In serious cases the business licence shall be revoked as well.

Article 34: If, in violation of this Law, the name used by a wholly individually-owned enterprise and the name registered with the registration authorities do not agree, an order for rectification within a set period of time shall be issued and a fine of Rmb 2,000 or less shall be imposed.

Article 35: If the business licence is altered, rented out or assigned, a rectification order shall be issued, illegal income confiscated and a fine of Rmb 3,000 or less imposed. In serious cases the business licence shall be revoked.

If a business licence is forged, an order to suspend business shall be issued, illegal income confiscated and a fine of Rmb 5,000 or less imposed. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 36: If a wholly individually-owned enterprise delays its commencement of business without a valid reason for more than six months after its establishment, or if it suspends business on its own initiative for a continuous period of six months or more after the commencement of business, its business licence shall be revoked.

Article 37: If this Law is violated by engaging in business activities in the name of a wholly individually-owned enterprise without having obtained a business licence, an order to cease business shall be issued and a fine of Rmb 3,000 or less imposed.

If a change occurs in the registered particulars of a wholly individually-owned enterprise and registration modification procedures are not carried out in accordance with the provisions hereof, an order shall be issued to carry out registration modification procedures within a set period of time. If the registration modification procedures are not carried out within the set time limit, a fine of Rmb 2,000 or less shall be imposed.

Article 38: If the person appointed or employed by the investor to manage the affairs of the wholly individually-owned enterprise breaches the contract entered into by the two parties and thereby causes the investor to suffer damage, the person appointed or employed shall be liable for civil damages.

Article 39: If a wholly individually-owned enterprise infringes on the legal rights and interests of staff and workers, fails to ensure the labour safety of staff and workers or fails to contribute social insurance premiums in violation of the provisions hereof, it shall be punished in accordance with the relevant laws and administrative regulations and the liability of the relevant responsible person shall be pursued.

Article 40: If the person appointed or employed by the investor violates the provisions of Article 20 hereof by infringing on the property rights and interests of the wholly individually-owned enterprise, he shall be ordered to restitute the appropriated property; if his infringement has caused losses for the enterprise, he shall be liable for damages in accordance with the law; if there is illegal income, his illegal income shall be confiscated; and if a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 41: If laws or administrative regulations are violated by forcibly requisitioning financial, material or labour resources from a wholly individually-owned enterprise, punishment shall be imposed in accordance with the relevant laws or administrative regulations and the liability of the relevant responsible person shall be pursued.

Article 42: If a wholly individually-owned enterprise and its investor conceal or transfer property before or during liquidation in order to evade debts, the property shall be recovered in accordance with the law and punishment shall be imposed in accordance with the relevant regulations. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 43: If an investor violates the provisions hereof and should assume liability for civil damages or pay a fine, but his property is insufficient to make payment or he has been sentenced to confiscation of property, he shall first assume liability for civil damages.

Article 44: If the registration authorities grant registration to a wholly individually-owned enterprise which does not meet the requirements stipulated herein, or deny registration to a wholly individually-owned enterprise which meets the requirements stipulated herein, the person directly in charge shall be subjected to administrative sanctions in accordance with the law. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 45: If relevant competent personnel of the authorities superior to the registration authorities forcibly order the registration authorities to grant registration to a wholly individually-owned enterprise which does not meet the requirements stipulated herein, or to deny registration to a wholly individually-owned enterprise which meets the requirements stipulated herein, or cover up the illegal registration acts of the registration authorities, the personnel directly responsible therefor shall be subjected to administrative sanctions in accordance with the law. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 46: If the registration authorities deny registration to an application which meets the statutory conditions or fail to issue a reply within the statutory time limit, the person concerned may apply for administrative review or file an administrative action in accordance with the law.

PART SIX: SUPPLEMENTARY PROVISIONS

Article 47: This Law does not apply to wholly foreign-owned enterprises.

Article 48: This Law shall be implemented as of 1 January 2000.

PRC, Wholly Individually-owned Enterprises Law

Ref no: 2130/1999.08.30

Legislative Background
The 1982 Constitution of the People's Republic of China first recognized the status of the wholly individually-owned sector. In 1988, the revised Constitution again accepted the concept of a privately-owned sector. But, at that time, the wholly individually-owned sector and other privately-owned enterprises were merely regarded as a supplement to the socialist publicly-owned sector.

According to the legislative plan of the 8th National People's Congress (NPC), the Financial and Economic Committee of the 8th NPC organized the:

1. State Economic Commission;
2. former State Structural Reform Commission;
3. Ministry of Agriculture; and
4. State Administration for Industry and Commerce (SAIC);

to begin the drafting of the PRC, Wholly Individually-owned Enterprises Law (the Law).

In March 1999 the 2nd Session of the 9th NPC revised the Constitution. One of the important principles for the revision of the Constitution was to further clarify the status of the non-publicly-owned sector, making the non-publicly-owned sector (which includes the wholly individually-owned sector) an important part of the socialist market economy. This is a great leap forward in China's economic thinking.

On 30 August 1999, this Law, which regulates the legal status of wholly individually-owned enterprises, was finally adopted at the 11th Session of the 9th NPC. Thus, with the promulgation of the Company Law, the Partnership Enterprises Law and the Wholly Individually-owned Enterprises Law, all the existing economic subjects of China have their respective laws to regulate their legal status and healthy development.

Relevance to Foreign Enterprises in China?
Why is the Law of interest to foreign enterprises in China? The simple answer is, although China will, in the long run, follow developed countries' lead and move towards increased use of incorporated entities offering the advantage of limited liability, in the short and medium term, the use of the form of partnership enterprises and wholly individually-owned enterprises will grow.

Foreign-invested enterprises will increasingly find themselves entering legal relations with Chinese wholly individually-owned enterprises, either directly or due to the growing use by PRC companies of sub-contracted outsourcing to small enterprises. It will certainly be beneficial to foreign parties if they have a better understanding of the basic legal structure which promotes wholly individually-owned enterprises, particularly in relation to the rights and interests of creditors.

Legal Framework
The Law has 48 articles in six chapters. In addition to some general principles and definitions, the Law sets out the legal rules governing the establishment, the administration of investors in and affairs, dissolution and liquidation, legal liability of wholly individually-owned enterprises.

The General Provisions:

1. outline the legislative purpose of the Law;

2. define of a wholly individually-owned enterprise;

3. determine domicile;

4. require observance of laws and administrative regulations and adherence to the principle of good faith;

5. protect private property and other rights and interests by the state;

6. require the enterprise to recruit and employ staff and workers according to the law;

7. require Chinese Communist Party members in wholly individually-owned enterprises to carry out their activities in accordance with the charter of the Chinese Communist Party.

Article 2 of the Law defines a wholly individually-owned enterprise as a business entity established in China in accordance with this Law that is invested in by a single natural person and the property of which is owned by the investor personally.

Setting Up a Wholly Individually-owned Enterprise
The Law sets out the requirements for the establishment of a wholly individually-owned enterprise as follows:

1. the investor shall be a natural person;

2. the enterprise shall have a lawful enterprise name;

3. the enterprise shall have the capital contribution declared by the investor;

4. the enterprise shall have a fixed place of production and business and the conditions necessary for its production and business shall exist; and

5. the enterprise shall have the necessary working personnel.

The application procedure to set up a wholly individually-owned enterprise can be completed within 15 days of receiving the application documents for establishment, provided the conditions stipulated in Article 8 are met.

The Law also specifies that, before obtaining the business licence for a wholly individually-owned enterprise, the investor shall not engage in business activities in the name of the wholly individually-owned enterprise.

Employees and Corruption
As the legal owner of the property of their enterprise, the investor may administer the affairs of the enterprise themselves, or appoint or employ another person with capacity for civil acts to take charge of managing affairs of the enterprise. For the purpose of protecting the legal owners' lawful rights and interests, Article 20 of the Law lists 10 things that the person appointed or employed by the investor is prohibited from doing.

Articles 25 and 41 show the legislators' concern about the encroachment on the rights and interests of wholly individually-owned enterprises. In the countryside this can occur more frequently where local officials could regard these enterprises as a source of pocket money. In Chinese newspapers and TV news reports, it would not be surprising to see stories explaining that the owner of a wholly individually-owned restaurant in a certain town was forced to close down. The reason for closing down would not be a result of too few customers, but because of government officials eating for free in the restaurant or because of debts that could not be collected from local government agencies.

Some wholly individually-owned enterprises could suffer the same fate, not because of lack of business, but rather due to forced invitations from local government agencies for donations or contributions. The legal protection provided in the Law will make the investors feel safer and encourage them to respond bravely to such illegal acts of local officials.

Penalties and Dissolution
Chapter 5 provides the legal liabilities of the acts of the wholly individually-owned enterprises and the possible punishment that may be rendered to them. The maximum fine for any violation of the Law is less than Rmb 5,000. The Law also provides the possible punishments that may be meted out to the persons employed by the investor, the government agencies, the officials or any other responsible person who may infringe upon the rights and interests of the wholly individually-owned enterprises and their owners.

Another area in which greater certainty has been imposed is dissolution and liquidation. Articles 26 to 32 describe the procedure which the investors must observe when dissolution and liquidation is inevitable. Creditors will appreciate such an orderly procedure for liquidation.

Unlimited Liabilty
One issue that should be considered is the liability of wholly individually-owned enterprises. Article 2 stipulates that the investor assumes unlimited liability for the debts of a wholly individually-owned enterprise. Article 31 also says that, if the property of a wholly individually-owned enterprise is insufficient to pay the debts in full, the investor shall use their personal property to pay the debts.

Since the personal property of an investor does not need to be registered as part of the investor's individual capital contribution, it could be problematic determining how the investor assumes unlimited liability with the whole of their personal property.

Under present circumstances, companies, especially foreign companies doing business in China, would not only need to check the amount of contributed capital specified in the business licence, but also investigate the investor's other personal property, so as to have a correct assessment of the risks.

Up until now, China does not have a fully developed industry that investigates another person's personal property. Without this information, people could be at risk when doing business with a wholly individually-owned enterprise.

In recent years, there have been a number of cases where creditors sought to enforce court judgments against wholly individually-owned enterprises. These individual investors that looked liquid previously, suddenly seemed to be unable to pay off the debts. The creditors knew that this was a trick, but, as their real estate was registered in their relatives' names and money was deposited in the bank with an anonymous name, it is difficult to have full enforcement of the court judgment against these individual owners. China still allows the practice the bank deposits without the presentation of an identity card.

Assignment
Article 35 stipulates that, if the business licence is altered, rented out or assigned, a rectification order shall be issued, illegal income confiscated and a fine of Rmb 3,000 or less imposed. In serious cases the business licence shall be revoked.

In practice, this article cannot be enforced easily. The main reason for this is that it is difficult to draw a demarcating line between renting out or assigning the business licence to another person and appointing or employing another person to take charge of managing the affairs of the enterprise.

In fact, many small enterprises, including some state-owned enterprises, are renting out their business premises together with the business licence to one person or one group as the contractor under a contracting out system. The owner simply collects a fixed rental fee as on a monthly or annual basis.

The Registration Procedure
Pursuant to Articles 12, 44, 45 and 46 of the Law, the investor that meets the conditions stipulated in the Law will receive a business licence and become registered within 15 days of submitting the application documents for establishment.

If registration is denied to an application that meets the statutory conditions or if a the authorities fail to issue a reply within the statutory time limit, the investor can apply for administrative reconsideration or file an administrative action in accordance with the law. These articles will greatly help to eliminate any illegal acts performed by local registration authorities.

However, the fact that the Law requires a wholly individually-owned enterprise to have a "lawful enterprise name" and to have "the necessary conditions and personnel for production" means that registration authorities have power to delay or deny registration to a wholly individually-owned enterprise, which in essence meets the statutory requirements.

Liability of Employees
There is a detailed list of things that employees of wholly individually-owned enterprises are prohibited from doing. The liabilities and possible penalties are provided in Articles 20 and 40. These provisions protect the lawful rights and interests of the investors in a wholly individually-owned enterprise.

However, in the event of such a dispute, it is unclear where the investor should seek remedies and which government agency or judicial organization would take charge of such a matter.

The above questions are partly due to uncertainty in the Law and partly due to the prevailing way of thinking in government agencies and judicial organs. In the previous decades, the infringement of the state-owned (or collectively-owned) assets or rights and interests was naturally regarded as a criminal offence and could be punished severely. According to traditional thinking, encroachment upon the rights and interests of a wholly individually-owned enterprises by an employee to manage the affairs of the enterprises could be regarded as an internal dispute to be settled between the investor and the employee themselves.

This type of thinking would consider that the limited resources of the government agencies or judicial organs should not be used to solve such disputes that do not affect the interests of the state or the general public.

Strengths
Wholly individually-owned enterprises have certain strengths and advantages in China, as they do in other countries. The establishment procedure and the conditions required are much simpler than that of a company. These enterprise are usually on a small scale and do not need much capital. The internal organization of these enterprises is also simple.

The restrictions or discrepancies among investors, which usually exist in partnership enterprises or companies, can be avoided. The business operation and management is flexible, so decisions can be made promptly. The types and quantities of the products as well as the sales method can be re-adjusted easily to the needs of the market at any time.

Growth
According to the statistics of SAIC, at the end of 1998 there were 1,360,000 privately-owned enterprises in China, of which 442,000 were wholly individually-owned enterprises. With the promulgation of the Law, wholly individually-owned enterprises have greater legal protection and will embark on a new road of development.

However, there are problems and issues that need to be solved. The lack of a strong financial supervision system and the various elements affecting efficient and prompt judicial enforcement could result in some new economic disputes between these wholly individually-owned enterprises and other companies in the actual implementation of the Law.

This new Law reflects the PRC government's intention to establish a comprehensive legal framework for growth in commercial relations in China and it will certainly play an important role in bringing more stability and predictability to this most flexible form of business enterprise.

The growth of these enterprises will greatly help promote competition in the Chinese market, prevent market monopoly, absorb more labour, increase employment opportunities and accelerate the development of the whole economy.