Enterprises in Hibernation; An Analysis of Dormant Companies
Affected by COVID, the world economy has been impacted for the past 2 years. Countless enterprises have faced or are facing the dilemma of stagnant operation and are unable to make ends meet.
For these enterprises, if they want to maintain themselves, they urgently need to seek a low-cost survival model. Therefore, the concept of dormant company has been raised more and more frequently of late.
A dormant company, similar to what we often call “zombie company”, refers to a company that exists in the legal sense, but actually has no business activities and any form of income at this stage. Dormant companies do not need to bear any risks brought by normal business operations, nor do they need to pay expenses, such as site leasing, employee wages, shareholder dividends, or even tax returns. It is more like a company in hibernation, maintaining its life at the least cost, waiting for the day when it is awakened.
Without the concept of dormancy, the forced closure of businesses is not only a loss for enterprise operators themselves, but also an obstruction to economic development and a waste of social resources. The dormant company system provides a buffer for enterprises to help them pass a special period smoothly, which is also of great significance to the development of the whole market.
In 2020, in the face of huge losses caused by COVID, the State Council of the People’s Republic of China proposed to try an “enterprise dormancy system”, in order to save small and medium-sized enterprises, and appointed Shenzhen as the first experimental area to take the lead in practicing the system.
On 24 August, 2021, Article 30 of the State Council of the People’s Republic of China promulgated the “Regulations of the People’s Republic of China on the Administration of the Registration of Market Entities”, which clearly states that, “In case of business difficulties caused by natural disasters, accident disasters, public health events, social security events and other reasons, the market entities can decide to close down within a certain period of time”.
Before dormancy, the company shall negotiate with its employees on labour relations and other related matters according to law, and publicise its dormancy period and legal document service address to the society through the registration authority. Also, in order to prevent dormant companies from becoming “zombie enterprises” that do not actively promote the market economy, the regulation stipulates that the upper limit of the closure period is 3 years, and once they carry out business activities during the closure period, they are deemed to resume business.
In short, the dormant company system in the world still has a long way to go, but as a system conducive to market development, it is destined to be valued by more countries, such as China, in the future.
The regulation is to be officially implemented in March, 2022, which is an important step forward for China’s market economy as it provides more possibilities for China’s small and medium-sized enterprises to survive.
As a result, Shenzhen has successively issued the “Several Measures of Shenzhen Market Supervision and Administration Bureau on Further Optimising the Business Environment and Better Serving Market Players” and the “Several Provisions of Shenzhen Special Economic Zone on Commercial Registration”, which stipulate that if a commercial subject needs to suspend its business temporarily but does not want to cancel the company, it can take the initiative to apply to relevant departments for closure, and the commercial subject will survive during the closure. In addition to not engaging in business activities, it still has other legitimate rights and interests in commercial subjects. After the closure period, the commercial subject needs to go to the relevant departments to register the termination of closure, and then the business can be resumed.