The Use of Trademark under OEM Contract

OEM (Original Equipment Manufacture) under current China practice refers to an arrangement between a Chinese manufacturer and an oversea company where products are produced by the Chinese manufacturer according to the requirements of the oversea company. Then the products are sold to the oversea company with trademark designated by the oversea company on the products. All the products are for export purpose and no domestic sale exists.

With regard to the risk of using the trademark in OEM business, the following possibilities shall be considered depending on the ownership of the trademark and the performance of the OEM contract:

I. The oversea company owns the trademark in China or is licensed to use such trademark in China.

A trademark owner can only be protected in a country where the trademark is registered. If he seeks to be protected in another country, the precondition is that he registered the same in that country, or he is licensed to use the trademark in that country.

If the oversea company owns the trademark in China or is licensed to use it in China, then the use of trademark under OEM is safe and without risk of infringement. However, before the products are resold in a market outside of China, the oversea company shall make sure such sale will not infringe the right of trademark owner in that area.

II. The oversea company owns the trademark in China or is licensed to use such trademark in China. However, the Chinese manufacturer violates the OEM contract by using the trademark on self-produced products and selling in Chinese market.

Under such circumstances, the Chinese manufacturer actually violates the OEM contract. The options left for the oversea company are either it can pursue against the Chinese manufacturer for breach of contract, or it can file a lawsuit with claim of trademark infringement. Before taking the legal action, if the possible compensation is a factor for consideration, the oversea company shall realize that in trademark infringement lawsuit, the compensation amount decided by the Chinese court without sufficient evidences for proving the profit gained by the Chinese manufacturer from the infringement or the loss suffered by the oversea company shall be no more than RMB 500,000. In our experience, the actual compensation available, in most cases, will be much lower than that number. So to avoid the occurrence of low compensation, when the OEM contract is concluded, we suggest a high amount of penalty can be agreed in that contract. So once unauthorized sale of products with the trademark by the Chinese manufacturer is found, a high penalty can be requested. Thus, a high penalty can, to some extent, help reduce the occurrence of violation on the side of Chinese manufacturer, since it may face big risk in doing that way.

III. After the OEM contract is finished, the Chinese manufacturer produces for itself or any other third party the products with the trademark without authorization.

For the purpose of business development, some Chinese companies do not have strong legal and risk awareness. After the OEM contract is finished, they may likely use the previous business as part of their promotion material and offer to produce the same products with the trademarks for any clients. Such behavior will obviously constitute trademark infringement.

IV. The oversea company owns the trademark or is licensed to use the trademark in its home country or other regions, but does not own the trademark in China. The trademark is owned by other company/individual in China.

Under current practice, during the export process, the products may probably be seized by the customs. However, if it is brought to the court, whether the use of trademark in OEM business can be decided as trademark infringement is still a disputable issue under current court practice.

The court judgments indicate a change of the opinion from determination of infringement to non-infringement for such case.

In 2010, a court in Shanghai received a case where a Chinese company produced products under OEM contract for a Korea company. The products are under trademark that the Korea company is licensed to use in Korea. However, in China, this trademark is owned by a HK company. The products were seized by the customs during the export process. The Chinese company filed the lawsuit to the court for recognition of non-infringement. Finally the court rendered the decision that the use of trademark by this Chinese company in OEM does not constitute infringement. The reasons are as follows:

1. The manufacture by the Chinese company is limited to OEM arrangement and all products are for export. No domestic sale exists;
2. The use of trademark by the Chinese company is with due authorization from the Korea company, who is licensed to use the trademark in Korea. Before concluding the OEM contract, the Chinese company has duly examined the trademark license agreement between the Korea company and the owner of trademark in Korea. Therefore, the Chinese company has no intention to commit infringement;
3. The use of trademark under OEM contract did not cause confusion in the market and therefore, will not bring loss to the trademark owner in China. Since all products are for export and no domestic sale exist, so the Chinese customers will not be confused about the source of the products.

With above reasons, the court determined that no infringement exists in this case.

Before that, most of Chinese courts support the opinion that as long as the trademark is used in China (whatever the products are sold in Chinese market), the infringement shall be determined. However, such judgment actually brings unfair impact to the Chinese manufacturers, who suffer big loss due to the infringement lawsuit.

The above precedent indicates the change of judgment in Chinese courts and has attracted attention from the Chinese manufacturers, oversea company and the Chinese trademark owners.

In consideration of the interest and risk prevention for related parties, we would like to give our advice to:

Oversea Company

In order to have a smooth performance of OEM contract as well as prevent potential risk, before the business starts, the followings shall be prepared:

1. The oversea company shall make sure that it is the trademark owner or licensed to use the trademark in both China and the country where the products are to be sold;
2. If the oversea company did not register the trademark in China, it shall at least own the right to use the trademark in the country where the products are to be sold. Meanwhile, it shall carry out investigation that who owns the same trademark in China and if the trademark has been filed for record in customs. By doing so, it shall realize all potential risks during the performance of OEM contract;
3. A complete OEM contract shall be concluded to protect the interest of the oversea company. The OEM contract shall bind the behavior of the Chinese company to make sure all products are only for export and the Chinese company shall not produce and sell in Chinese market without authorization. A strict penalty shall be applied in case of violation by the Chinese company;
4. To avoid customs seizure, if the conditions allow, the adding of trademark on the finished products can be done after the products are exported from China.

Chinese Manufacturer:

Once trademark infringement lawsuit occurs, the Chinese company will inevitably be involved in such lawsuit as defendant. In those lawsuits, the Chinese company has to spend a lot of time and cost for the lawsuit. To prevent such risk, before accepting the OEM business, the Chinese company shall examine:

1. Whether the oversea company owns the trademark in China;
2. if not, it shall request the oversea company to provide its trademark certificate or trademark license outside of China;
3. after examination and consideration of potential risk, in the OEM contract, the Chinese company can agree with the oversea company that once the products are seized by the customs or a lawsuit is filed due to the use of trademark, the oversea company is liable to cooperate with and compensate the Chinese company for any loss suffered in such legal action. Meanwhile, the Chinese company shall not be liable for compensation from late delivery of products due to the legal proceedings.

The Owner of Trademark

The owner of trademark is a third party to the OEM contract. However, since its trademark is used in the OEM business where it is not a party to the contract, therefore it shall be an interesting party. In most lawsuits filed for trademark infringement, it acts as plaintiff.

Although the recent precedent indicates the owner’s right in above IV situation is not infringed. However, not all Chinese courts are now following this precedent. On the other hand, active right defence can also be a way to increase the brand influence. For these considerations, the owner can

1. take measure to prevent potential infringement, including but not limited to file the trademark for customs record;
2. If the owner is an oversea company, it shall take measures to keep the trademark valid. In accordance with the current Trademark Law, if the trademark is not used for three consecutive years after registration, the Trademark Office can revoke it. Therefore, the use of the trademark is a condition for keeping it valid. The oversea company shall commercially use it in China so that the trademark will not be revoked;
3. Once the infringement is found, it shall actively defend its right.

Hi Erex,

How can a WFOE change ownership in the following situations:
-if one partner decides to sell out
-if one partner is retiring/passes away
-if one partner declares bankruptcy and shuts down

Thanks!

Hello.

A general enquiry:

i) is the WOFE an investment vehicle found only in China?
ii) If not, is it always referred to as a WOFE, or does it have another name(s) in other parts of the world?

MoonOverMiami wrote:Hi Erex,

How can a WFOE change ownership in the following situations:
-if one partner decides to sell out
-if one partner is retiring/passes away
-if one partner declares bankruptcy and shuts down

Thanks!

Usually it can be done through change of shareholders:

- The partner who wants to sell his shares in the wofe can find a buyer and a stock transfer agreement can be concluded and change of shareholders can be made in the authority;
- If the shareholder passes away, his shares can be succeeded;
- its shares in the WOFE will be part of the asset for liquidation and probably can be sold to a third party and the proceeds from the sale can be distributed to the creditors.

ATP wrote:Hello.

A general enquiry:

i) is the WOFE an investment vehicle found only in China?
ii) If not, is it always referred to as a WOFE, or does it have another name(s) in other parts of the world?

WOFE refers to Wholly-owned foreign enterprise, which is a type of business in current foreign investment in China.

erexchen wrote:

ATP wrote:Hello.

A general enquiry:

i) is the WOFE an investment vehicle found only in China?
ii) If not, is it always referred to as a WOFE, or does it have another name(s) in other parts of the world?

WOFE refers to Wholly-owned foreign enterprise, which is a type of business in current foreign investment in China.

Would you know if it is only found in China? Or is it used elsewhere in other countries? Does it go just by the name WOFE or some other name(s)?

Thanks.

erexchen wrote:

MoonOverMiami wrote:Hi Erex,

How can a WFOE change ownership in the following situations:
-if one partner decides to sell out
-if one partner is retiring/passes away
-if one partner declares bankruptcy and shuts down

Thanks!

Usually it can be done through change of shareholders:

- The partner who wants to sell his shares in the wofe can find a buyer and a stock transfer agreement can be concluded and change of shareholders can be made in the authority;
- If the shareholder passes away, his shares can be succeeded;
- its shares in the WOFE will be part of the asset for liquidation and probably can be sold to a third party and the proceeds from the sale can be distributed to the creditors.

Thanks Erex!

Another question is this: WOFE is registered under 2 shareholders. One of the shareholders, an American company, would like to register its Chinese name and use the Chinese name as the partner on the business certificate. Is this easily done?

ATP wrote:

erexchen wrote:

ATP wrote:Hello.

A general enquiry:

i) is the WOFE an investment vehicle found only in China?
ii) If not, is it always referred to as a WOFE, or does it have another name(s) in other parts of the world?

WOFE refers to Wholly-owned foreign enterprise, which is a type of business in current foreign investment in China.

Would you know if it is only found in China? Or is it used elsewhere in other countries? Does it go just by the name WOFE or some other name(s)?

Thanks.

As far as I know it is usually used in China. WOFE or WFOE

MoonOverMiami wrote:

erexchen wrote:

MoonOverMiami wrote:Hi Erex,

How can a WFOE change ownership in the following situations:
-if one partner decides to sell out
-if one partner is retiring/passes away
-if one partner declares bankruptcy and shuts down

Thanks!

Usually it can be done through change of shareholders:

- The partner who wants to sell his shares in the wofe can find a buyer and a stock transfer agreement can be concluded and change of shareholders can be made in the authority;
- If the shareholder passes away, his shares can be succeeded;
- its shares in the WOFE will be part of the asset for liquidation and probably can be sold to a third party and the proceeds from the sale can be distributed to the creditors.

Thanks Erex!

Another question is this: WOFE is registered under 2 shareholders. One of the shareholders, an American company, would like to register its Chinese name and use the Chinese name as the partner on the business certificate. Is this easily done?

Not quite sure what you mean, Can you give an example?

Sure...

ABC Corporation and DEF Limited opened a WFOE in Shanghai. ABC adopted the Chinese name 阿爸才公司, and would like to register that name in China and change the names on the WFOE Business License from ABC Corp/DEF Limted to 阿爸才公司/DEF Limited.

Is the ABC an oversea company? or a China-registered company?

Both are overseas.

First of all, I don't think a foreign company can register its Chinese name in China authority. In most cases, it can just use its translation name in its business. So unless the Chinese name appears in its business registration certificate in its home country, it cannot use the Chinese name on the WOFE's business license.

Interesting, thanks Erex.

Hi... Please give case judgement or site where the same can be studied in detail...

Hi Erexchen,

I am in need of authorizing a statutory declaration for some legal documents. Do you know whom should I go to for this? Is there any such practice in Shanghai ?

Much appreciated..

Hello

Some people on this forum referred me to you.

I could really use some help.

A fraudster in China posed as my supplier and somehow stole the current invoice from him. Then he changed his banking information on the invoice and got us to wire him almost $11,000 from our account.

We realized this fraud when our actual supplier contacted us that they never received the money.

We only have THIEF'S person's bank account information.
He used proxy on his email to hide.

We contacted Chinese police but they are saying they cannot do anything until USA police contact them? Is this true?

The local police here in Los Angeles wont file a report because they claim the crime was commited in China, wth?

The wire was send on afternoon of June 18, my credit union sent fraud notice on June 20 morning to Bank of China. What are the odds of saving this money?


What would be the best way to catch this thief? Please help

I really would appreciate some feedback.

Thank you
--------------------

LATEST UPDATE

>> The thief stole supplier email ID but supplier is telling me that police telling him that he is not the direct victim so they cannot do anything.

>> i am considering going to china myself to file this report. but one lawyer is saying that they may not take report or ever catch the thief, another is saying its real easy to file report and catch this thief

>> i realized that on the bank wire, the bank put the "REAL" supplier beneficiary address instead of the address that thief wanted. so technically bank of china should return money. But bank of china replied today saying that they wont return the money

Please advise what I should do, I feel helpless.

shanghailuv wrote:Hi Erexchen,

I am in need of authorizing a statutory declaration for some legal documents. Do you know whom should I go to for this? Is there any such practice in Shanghai ?

Much appreciated..

Not sure which documents and for what purpose. You can write to me erexcxl@gmail.com and I can help have a look.

paperjones wrote:Hello

Some people on this forum referred me to you.

I could really use some help.

A fraudster in China posed as my supplier and somehow stole the current invoice from him. Then he changed his banking information on the invoice and got us to wire him almost $11,000 from our account.

We realized this fraud when our actual supplier contacted us that they never received the money.

We only have THIEF'S person's bank account information.
He used proxy on his email to hide.

We contacted Chinese police but they are saying they cannot do anything until USA police contact them? Is this true?

The local police here in Los Angeles wont file a report because they claim the crime was commited in China, wth?

The wire was send on afternoon of June 18, my credit union sent fraud notice on June 20 morning to Bank of China. What are the odds of saving this money?


What would be the best way to catch this thief? Please help

I really would appreciate some feedback.

Thank you
--------------------

LATEST UPDATE

>> The thief stole supplier email ID but supplier is telling me that police telling him that he is not the direct victim so they cannot do anything.

>> i am considering going to china myself to file this report. but one lawyer is saying that they may not take report or ever catch the thief, another is saying its real easy to file report and catch this thief

>> i realized that on the bank wire, the bank put the "REAL" supplier beneficiary address instead of the address that thief wanted. so technically bank of china should return money. But bank of china replied today saying that they wont return the money

Please advise what I should do, I feel helpless.

I think the only way is to report to China police in your/your company name. Hopefully they can find out who is the real receiver. I think the police may have way to find out, as long as they do it.

Another thing which is doubt is if this thief has some relationship with the supplier. Is it a staff of the supplier?

Erex,

I have just been informed today of the government's new policy/ies toward visas for expatriates. I do not yet know the specifics, as they have been recently announced in Chinese.

Are you able to provide us guidance on what the changes are, who and how they will be affected?

Thanks.

China Allows Limited Debt-for-Equity Swap

It is very common that debt may occur in the economic activities between enterprises. However, once the debtor is in a financial difficulty and unable to pay off the debt in time, the remedy left for the creditor shall be very limited. In many cases, the creditor may hesitate whether it shall file a lawsuit to solve the debt issue. The reason is if the failure in payment by the debtor is really caused due to the financial problem, even the creditor wins the lawsuit after long time litigation, the enforcement shall still be a long term process with uncertain result. In extreme cases, the debtor may be filed for bankruptcy if there are many creditors and the asset of the debtor is not sufficient to pay off all debt. Under such circumstances, the business and operation of the debtor may have to be stopped.

As a part of effort to solve the financial difficulty in enterprises, the State Administration of Industry and Commerce (“SAIC”) promulgated “Administrative Measures for Corporate Debt-for-Equity Swap Registration” (“Measures”) in November of 2011, which allows the creditors to swap the debt for corporate equity under certain conditions, so that the debtor can reduce its burden of debt and solve the financial problems. To the creditor, by swapping the debt for equity, it can also reduce the risk of bad debt and open a new door for investment.

The Scope for Debt-for-Equity Swap

In accordance with the Measures, debt-for-equity swap shall be limited to the debt of a limited liability company or stock corporation registered in the territory of China. If the debtor is a partnership or other non-corporate entities, then debt-for-equity swap shall not apply.

In addition, only the debt which falls into one of the following circumstances can be allowed to be swapped for equity:

I. The contractual debts arising between creditor and debtor during business operations. The creditor should have performed all its obligations under the contract which are relating to debt payable by the debtor. Furthermore, the performance of the contract by the creditor shall not be in violation of the law and regulation of the State as well as the article of association of the debtor;
II. Debt confirmed by effective judgments made by the courts; or
III. Debts listed in reorganization plans approved by the courts or settlement agreements ruled and accepted by the courts during the course of bankruptcy reorganization or settlement.

The Limitation of the Amount of the Contribution from Debt-for-Equity Swap

In accordance with the Measures, as a special form of contribution, the debt to be swapped for equity shall be deemed as non-monetary contribution, which shall be appraised by certified asset appraisal firm and verified by certified accounting firm according to current corporate law. A verification report shall be issued accordingly. The contribution amount from debt-for-equity swap shall not exceed the appraised value of the debt.

The sum of the contribution amount from debt-for-equity swap and other non-monetary property shall not exceed 70% of the debtor’s corporate registered capital.

Therefore, debt to be swapped for equity shall be limited in terms of its appraised value as well as non-monetary contribution proportion.

The Registration of Debt-for-Equity Swap

If the debtor plans to swap debt for equity, it shall apply to the authority with required documents and submit for registration change in registered capital and paid-up capital. The authority, after approval, shall mark debt-for-equity swap in the legal document and make public for such registration information.

Dear Erex,

lots of good information here!
I have sent you an email with a question. Would be great to get your opinion!

Thanks

Yes I will call you to discuss your case.

How to effectively implement Non-Competition Agreement with Employees

Why Non-Competition Agreement shall be signed with Employees?

Non-Competition Agreement is signed with Employee who grasps the business secret of the company for the purpose of preventing him from seeking employment in the Employer’s competitors or engaging in competitive business by himself after the termination of the employment contract with the Employer. The purpose of such Non-Competition Agreement is to prevent the disclosure or improper use of the business secret.

Not all Employees shall be subject to Non-Competition Agreement. In accordance with relevant law, Non-Competition Agreement is usually used for senior management personnel, senior technical personnel and other employee subject to confidentiality liability. Generally speaking, Employees including senior managers, senior marketing staffs, technical developers, key information staffs etc can be party to Non-Competition Agreement. Since these Employees grasp the business secret of the Employer, a Confidentiality Agreement shall be signed with them at the same time Non-Competition Agreement is signed. For other employees, it is not necessary to sign Non-Competition Agreement.

In accordance with current labor law, Employee enjoys the freedom in choosing job at his own will. In the event no special agreement exists for job limitation (such as Service Agreement), any Employee can resign by giving 30 days prior written notice. Without any limitation to the Employee who grasps the business secret of the Employer in his job choice, unfair competition may happen and the Employer’s interest will be damaged. Under such circumstances, a legal binding Non-Competition Agreement is quite necessary.

Current difficulties and problems in implementing Non-Competition Agreement

Although most of Employers understand the purpose and function of Non-Competition Agreement, it is not popular phenomena that Employers sign or implement Non-Competition Agreement with the Employees. The main reasons are as follows:

I. The Employer may doubt if the Employee can actually fulfill his liability of non-competition.

The performance of Non-Competition Agreement depends on strict fulfillment of the obligation of non-competition by the Employee. Such obligations include: 1) the Employee shall not work for other companies competing with the Employer; 2) the Employee shall not engage in competitive business by himself. Without a complete supervision system, it is difficult for the Employer to appraise the Employee’s fulfillment of his obligations.

II. In order to ensure the validity of Non-competition Agreement, the Employer is obliged to pay compensation to the Employee.

With a Non-Competition Agreement, the Employee’s right in choosing job and obtaining remuneration is limited since he cannot do the job he is good at. Therefore, his income will be reduced accordingly. Thus, the law requires that the Employer must pay compensation to the Employee who is subject to the non-competition obligation. For some employers, since they are not able to trace the Employee for supervising his fulfillment of the obligations, and at the same time additional cost has to be paid, they may choose not to enter into the Non-Competition Agreement with the Employees.

III. Dispute over the existence of competition relationship

Non-Competition Agreement requires the Employees not to work for other employers competitive with the Employer within a certain period (no longer than 2 years). However, it may be controversial that which companies have competition relationship with the Employer. Thus, the dispute may arise to the existence of competition relationship.

Advice and Suggestion

According to our experience in dealing with cases involving non-competition agreement, from the perspective of the Employer, we have the following advice and suggestion for reference:

I. To avoid potential dispute, it is necessary to illustrate the current key competitors in Non-Competition Agreement.

The Employer shall be aware which companies constitute competitors in its industry. Therefore, in Non-Competition Agreement, we suggest the scope of known competitors shall be clarified. In this way, the Employer is able to reminder the Employee the list of competitors that the Employee is not allowed to work for. If the Employee is found to work for these competitors, he shall be deemed to have breached Non-Competition Agreement.

II. To clarify the condition for payment of Non-Competition compensation

Since Non-Competition Agreement shall be carried out after the Employee leaves the Employer, to some extent, the Employer is difficult to learn the activities of the Employee after he leaves the Employer. To strike a balance, the Non-Competition compensation can be paid to the Employee on a monthly basis. In the Non-Competition Agreement, it can be agreed that prior to the payment of compensation every month, the Employee shall honestly report his working and living status. If the Employee refuses to report, or the report obviously conflict with the fact investigated, the Employer shall have reasons to believe that the Employee does not fulfill his obligation of non-competition. Under such circumstances, the Employer can option to terminate the Non-Competition Agreement by giving one month notice to avoid further loss, or the Employer can investigate the evidence of violation of non-competition obligation by the Employee and pursue against him for the breach of contract.

III. High penalty shall be imposed.

In the Non-Competition Agreement, a high penalty shall be imposed, which can be a deterring measure against the Employee in case of breaching the Agreement.

IV. If the Employer wants to stop paying the non-competition compensation, it shall send a prior written notice of termination to the Employee.

Most employers believe that as long as they stop paying the compensation to the Employee, the Non-Competition Agreement will be terminated automatically. Unfortunately that is not correct. Due to the misunderstanding, some employers are pursued for compensation by the Employee through arbitration or litigation. If the Employer has no intention to continue the Non-Competition Agreement, or it doubts the Employee has breached the Agreement and therefore wants to have an early termination of the Agreement, then one month prior written notice shall be sent to the Employee, which is a necessary procedure to follow as required by the law.

According to me chinese lawyer is a lawyer that can be solve our legal matter. In china there are so many professional experience lawyer on internet. So we can easily to find a good one chinese lawyer in shortest time.

AndruLuka wrote:According to me chinese lawyer is a lawyer that can be solve our legal matter. In china there are so many professional experience lawyer on internet. So we can easily to find a good one chinese lawyer in shortest time.

Yes, I agree that our Chinese lawyers are good at their jobs. But there is a pretty normal misunderstanding for foreigners is that they think Chinese lawyers are the same as those in the western world, in another word, you must find a lawyer to fix all kinds of situations and help you out. The truth is not.
All kinds of consultants did almost all the jobs instead of lawyers such as company set up, trademark registration, visas, insurance, loans, investments and many more. Tons of cases are handed over from lawyers to consultants every minutes in China. For example, a lawyer will charge you 30000 rmb for a WFOE registraion, you may think it's ok, but you will never know he will hand over the project to a consultant or agent company that specializes in this business at a price of 15000 rmb in next hour. Why this? Foreign people like lawyer and this little misunderstanding.

Major Adjustment will be made to the System of Labor Dispatching

The newly revised Labor Contract Law makes major adjustment to the labor dispatching. Such adjustment includes:

1. Raise the requirements of setting up a labor dispatching enterprise. According to the new rule, the registered capital of a labor dispatching enterprise should be no less than 2 million RMB and can engage in the business of labor dispatching only after it gets approval from the labor administrative department.
2. Labor dispatching can only be used as a supplementary way of employment. It can only be used for temporary, auxiliary or substitute positions.
3. The number of employees used by the company through labor dispatching shall not exceed a certain proportion of its entire employees. The local administrative department is entitled to specify the proportion.

On the perspective of the employer, labor dispatching is attractive to the medium and small sized enterprises due to the advantage of lower enterprise cost, more convenient human resource management and less labor disputes. Especially to foreign-invested enterprises, when they start to enter the Chinese market, labor dispatching is widely used because of their small scale and lack of the experience of human resource management. Many foreign-invested enterprises even use all of its employees through labor dispatching.

However, with the amendment of the Labor Contract Law, the above mentioned labor dispatching system will be greatly changed. The aforementioned situation 2 and 3 will particularly affect the enterprises.

The rule that labor dispatching can only be used for temporary, auxiliary or substitute positions, which means the position for labor dispatching can last no longer than 6 months and the dispatched employees can only hold the non-main business-related position or temporarily substitute the formal employees of the company during the period they are on leave or engaging in studies.

Furthermore, pursuant to the rule, the use of all employees through labor dispatching is prohibited, and the proportion of the dispatched employees will be restricted by law.

Several Issues the Creditor should be concerned in Bankruptcy Filing

Under current bankruptcy legal system in China, either the creditor or the debtor may act as the applicant for bankruptcy filing. However, the conditions, procedure and meaning of the filing by the creditor or debtor are not always the same.

We hereby will discuss several special points in relation to the bankruptcy filed by the creditor.

I. The conditions of filing bankruptcy by the creditor

Under current law, when the creditor files bankruptcy against the debtor, it is not liable to provide evidences proving the debtor’s asset is not sufficient to pay off the debt, or the debtor obviously lacks the capability of paying off the debt. The creditor can file the bankruptcy to the court where the debtor is located as long as it is able to prove that the debtor fails to pay off its due and payable debt.

After the court receives the bankruptcy filing, if the debtor fails to prove to the court the non-existence of circumstances including 1) the debtor’s asset is not sufficient to pay off the debt, and 2) the debtor obviously lacks the capability of paying off the debt within a designated time limit set by the court, the court may assume that the filing by the creditor meet the conditions of bankruptcy and decide to accept the bankruptcy filing.

The above mentioned regulation allows creditor in a most favorable position in filing a bankruptcy application. In consideration of the fact that the capability of debt payment on the side of the debtor is the key factor to the success in enforcement, if the creditor is able to be aware of the debtor’s capability of debt payment in advance through bankruptcy procedure, it can avoid long time lawsuit and enforcement and expensive cost, and thus, solve the debt issues rapidly and timely.

To prove the debtor fails to pay off the due debt, the creditor has to prove:

1. Debtor-creditor relationship has been established;
2. Debt is due to pay;
3. Debtor fails to pay off the whole debt.

II. The creditor’s right of filing bankruptcy

Under current environment, after the enterprise is dissolved, it is frequently happened that the enterprise fails to make the liquidation, or delay the liquidation after the start of liquidation procedure. Under such circumstances, creditor has right to file bankruptcy to the court. Unless the debtor proves no bankruptcy occurs to it within the designated time limit set by the court, the court shall accept the bankruptcy filing by the creditor. The debtor shall go into the bankruptcy liquidation procedure as presided by the court.

III. The obligation of the debtor for submitting relevant financial documents

After the court accepts bankruptcy case, it is the debtor’s duty to submit statement on its asset status, a checklist of debts, a checklist of creditor’s rights, a financial and accounting report, etc. If the debtor refuses to provide, the court may impose compulsory measures such as a fine to the direct and responsible person in the debtor’s enterprise.

IV. The creditor’s right to file bankruptcy to the upper level court

Due to the sensitivity of the bankruptcy case, as well as the proficiency of Chinese local court in handling such cases, it frequently occurs that court fails to exam the case in time after the creditor files the bankruptcy or fails to make ruling in time. To avoid the occurrence of such situation, the regulation allows the creditor to file the bankruptcy directly to the upper lever court so that the upper level court may supervise and force its affiliate court to accept the bankruptcy case or make ruling in time.

How to Arrange the Severance Payment for Employee in Case of Change of Employer

According to the latest judicial interpretation, in the event the employee is dispatched to a new employer by the old employer due to reason the employee is not involved and the old employee fails to pay the severance payment, the employee is entitled to request the new employer to pay the severance payment in relation to the working years in the old employer when the employee terminates the employment contract with the new employer according to article 38 of the Labor Contract Law, or the new employer terminates the contract where the new employer is liable to pay severance payment to the employee, the working years of the employee in the old employer shall be calculated into that of the new employer for the calculation of severance payment for the employee.

The above clarifies the burden of severance payment for the part of working years in the old employer between the old employer and the new employer in case of change of employer due to reason the employee is not involved. In our experience, the following two options can be considered in dealing with such issue:

1. When the employee is changed to the employee of the new employer, the old employer or new employer shall pay off the severance payment for the part of working years in the old employer. Meanwhile, the old contract is terminated. A new employment contract shall be concluded by the employee and new employer.

2. When the employee is changed to the employee of the new employer, his/her severance payment for the part of working years in the old employer is not settled immediately. The rights and obligations of the old employer in the employment contract shall be assigned to the new employer.

For the above two situations, we make analysis as below.

1. In the event the change of employer is arranged by the real controller among the companies under the same group, or between affiliated companies, we suggest the settlement of severance payment for the part of working years in the old employer not happen immediately. Such severance payment can be borne by the new employer. The merit of such practice lies in the new employer can be discharged of the liability for paying severance payment in case of employee’s resignation or other circumstances of termination where the employer is not liable to pay severance payment in the future. Furthermore, such practice may play a positive role in stabilizing the employees because the employee deposit more expected benefit in the new employer;

2. In the event the change of employer is caused due to the M&A, sale of company etc which is related to the adjustment of investment strategy, from the perspective of new employer, the best is the old employer can settle all severance payment for the employee and terminate the old employment contract, so that no potential labor dispute shall be brought into the new employer, which may cause uncontrollable risk. Of course, such payment can be a factor for negotiating the price for M&A. Under special circumstances, it can be considered that the new employer takes the liability of paying the employee severance payment for the part of working years in the old employer.

By Erex Chen
Partner of Ganus Law Offices