Essay on ECG Group: Fraud and Liquidation of a Joint Venture in China
This case is devoted to analyzing interactions and communications issues pertaining to an internal joint venture. ECG Group is a multinational company operating in the sphere of construction, automation and intelligent control devices for buildings. Growing Chinese construction market presented numerous opportunities, and ECG Group formed a joint venture between its US-based division, ECG US and Chinese CIG Ltd, dividing ownership as 60% and 40% accordingly (O’Connor, n.d.). Unfortunately, the management of the joint venture did not pay enough attention to controlling the operations and accounting transactions. As a result the joint venture arrived to a large negative balance due to fraudulent accounting practices and the use of a Chinese intermediary for currency exchange (O’Connor, n.d.).
The situation at Realton JV indicates that it is highly important to have built-in control systems in multinational ventures and to study business standards and conditions guiding the operations. First of all, ECG US should present the results of the financing audit to CIG Ltd. and outline the need for financial investigation and court examination. It would be useful to negotiate with CIG Ltd. and offer closing the joint venture instead of starting a lengthy trial with both parties involved.
If CIG Ltd. remains adamant about continuing operations, it is recommended to explore the terms of joint venture and Chinese laws with regard to additional conditions of terminating a foreign-invested joint venture. Chinese regulations outline the following causes for terminating a joint venture: expiration of the terms of contract, mutual agreement of investors, failure of one of the parties to fulfill its contract liabilities, serious losses and inability to operate due to government interventions or force majeure, insolvency of the company, violation of law, etc.
ECG US should first of all review the responsibilities of CIG Ltd. described in the contract and file complaints if CIG Ltd. failed to fulfill its contract liabilities, since this will be a reasonable cause for ending the joint venture. If CIG Ltd. is formally fulfilling its responsibilities, then ECG US can file bankruptcy due to insolvency and stop operations due to this reason.
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