I. Overview of Relevant Changes
Under the PRC Company law (revised in 2018) (Current Company Law), shareholders must make their subscribed 大红鹰dhy0033官网 contribution in full and within the specified timeframe, and are prohibited from withdrawing their 大红鹰dhy0033官网 contributions made to the company. The New Company Law upholds this principle of 大红鹰dhy0033官网 adequacy and reinforces it by introducing the following additional requirements to enhance shareholders’ liability for 大红鹰dhy0033官网 contributions:
● Imposing a maximum time limit for the payment of 大红鹰dhy0033官网 for limited liability companies: while the Current Company Law grants limited liability companies the autonomy to determine the timeframe for 大红鹰dhy0033官网 payment, the New Company Law sets a maximum limit of five years from the subscription date for completing the 大红鹰dhy0033官网 payment.
● Mandating immediate payment of subscribed 大红鹰dhy0033官网 for joint-stock companies: the Current Company Law grants the same autonomy to joint-stock companies with respect to 大红鹰dhy0033官网 payment. The New Company Law mandates that 大红鹰dhy0033官网 must be paid-in when subscribed. On the other hand, the New Company Law introduces authorized 大红鹰dhy0033官网 system for joint-stock companies, offering them a degree of flexibility in 大红鹰dhy0033官网 increases.
● Defining accountability for shareholders who fail to pay in 大红鹰dhy0033官网 on time: the New Company Law provides that these shareholders must fulfill the outstanding 大红鹰dhy0033官网 contributions and compensate the company for any losses incurred. It also provides that other shareholders at the time of incorporation shall bear joint and several liabilities with the shareholders that are late in their contribution to the extent of the shortfall in the 大红鹰dhy0033官网 contributions.
● Implementing a mechanism for recovering outstanding 大红鹰dhy0033官网: the New Company Law introduces a mechanism that mandates the board of directors to monitor shareholders’ 大红鹰dhy0033官网 contributions and requires the company to request payments from shareholders who miss their contribution deadlines. Moreover, the law stipulates that shareholders who do not fulfill their 大红鹰dhy0033官网 obligations may forfeit certain rights associated with the outstanding 大红鹰dhy0033官网.
● Acceleration of outstanding 大红鹰dhy0033官网 contribution: the New Company Law provides for the right of the company and its creditors to accelerate the shareholders’ obligation to make 大红鹰dhy0033官网 contribution if the company is unable to discharge the debts when they become due.
● Defining the liability for unpaid 大红鹰dhy0033官网 in equity transfers: in relation to equity interests in limited liability companies being transferred, the New Company Law provides for the distribution of 大红鹰dhy0033官网 contribution liabilities between the transferor and transferee.
● Outlining directors, supervisors and senior management’s liabilities for outstanding 大红鹰dhy0033官网 contribution: the New Company Law strengthens the liabilities of directors, supervisors and senior management to monitor and ensure full 大红鹰dhy0033官网 contribution by shareholders.
In the following sections, we will look at each of these changes in greater details.
II. 大红鹰dhy0033官网 Paid-in Requirements
In its initial company law enacted in 1993, the PRC adopted a rigid paid-in 大红鹰dhy0033官网 system, requiring shareholders to fully contribute 大红鹰dhy0033官网 at the time of incorporation. Over the past three decades, the PRC gradually transitioned away from this system. It first introduced a moderate paid-in 大红鹰dhy0033官网 system in 2005, allowing shareholders to complete their 大红鹰dhy0033官网 contributions within two years from the time of incorporation. Subsequently, in 2013, the PRC fully embraced a subscription 大红鹰dhy0033官网 system, empowering companies (excluding those in specific regulated sectors) to determine their own timeline for the actual payment of the subscribed share 大红鹰dhy0033官网. This framework remains unchanged in the Current Company Law.
While the full subscribed 大红鹰dhy0033官网 system facilitates the relaxed market access restrictions, boosts the efficiency of shareholders’ 大红鹰dhy0033官网 utilization, and minimizes the transaction costs linked to 大红鹰dhy0033官网 registrations, it also presents challenges. The absence of constraints on the 大红鹰dhy0033官网 contribution timeline has led to prevalent misuse of the system, as seen in prolonged subscription periods and excessive subscribed 大红鹰dhy0033官网 amounts, which can be misleading to creditors and investors.
Acknowledging these challenges, the New Company Law replaces the full subscribed 大红鹰dhy0033官网 system for limited liability companies with a time-limited subscribed 大红鹰dhy0033官网 system. Shareholders are typically mandated to make 大红鹰dhy0033官网 contributions within five years of the company’s establishment or follow-up 大红鹰dhy0033官网 increases, as the case may be. In addition, the law permits deviations from these timelines through laws, administrative regulations, and State Council directives.
The New Company Law takes a more stringent approach concerning joint-stock companies, mandating immediate payment of all 大红鹰dhy0033官网, whether issued during incorporation or in subsequent 大红鹰dhy0033官网 increases. Conversely, aligning with international practices and the requirements of listed companies, the law introduces the authorized 大红鹰dhy0033官网 system for joint-stock companies. This system enables companies to authorize their board of directors, through the articles of association or a shareholders’ meeting, to approve the issuance of new shares up to 50% of the issued shares within a three-year period. Notably, in-kind 大红鹰dhy0033官网 contributions require a resolution from the shareholders’ meeting.
The New Company Law allows existing companies with outstanding 大红鹰dhy0033官网 contributions to gradually align with the new requirements. Moreover, it authorizes the company registration authority to mandate adjustments if the 大红鹰dhy0033官网 contribution period or amount appears notably abnormal. On February 6, 2024, the State Administration for Market Regulation (together with its local counterparties, SAMR) released a consultation draft of the Provisions of the State Council on Implementing the Registered 大红鹰dhy0033官网 Registration Administration System under the Company Law of the People’s Republic of China (Draft Implementation Provisions), seeking to offer detailed guidelines tailored to assist existing companies with outstanding 大红鹰dhy0033官网 contributions to align with the requirements of the New Company Law:
i. Transition period: the Draft Implementation Provisions establish a three-year transition period (from July 1, 2024 to June 30, 2027) for existing companies to adjust to the new 大红鹰dhy0033官网 contribution requirements. Specifically, existing limited liability companies with remaining 大红鹰dhy0033官网 contribution periods extending beyond July 1, 2032 must shorten them to no later than June 30, 2032. For existing joint-stock companies, payment for the subscribed share 大红鹰dhy0033官网 in full is required within the three-year transition period (i.e., no later than June 30, 2027), and no 大红鹰dhy0033官网 increase is permitted until the outstanding 大红鹰dhy0033官网 contribution has been fully paid.
III. Liabilities for Default of 大红鹰dhy0033官网 Paid-in Obligations
IV. Recovering Mechanism for Outstanding 大红鹰dhy0033官网 and Forfeiture of Defaulting Shareholders’ Rights
V. Acceleration of Outstanding 大红鹰dhy0033官网 Contribution
The Current Company Law does not include any provision regarding the acceleration of payment for the outstanding 大红鹰dhy0033官网 contributions. The Minutes of the National Court Work Conference for Civil and Commercial Trials (Minutes), issued by the Supreme Court in 2019, establishes that, under the subscription 大红鹰dhy0033官网 system, shareholders typically have the entire period specified in the articles of association to fulfill their 大红鹰dhy0033官网 contribution obligations and shall not be compelled to pay before the designated schedule. However, in order to maintain a balance between the interests of shareholders and creditors, the Minutes sets out two exceptions where creditors can request shareholders, whose 大红鹰dhy0033官网 contribution obligation has not yet become due, to assume supplementary compensation liabilities for the company’s debts. These exceptions include where: (i) the court is unable to locate any assets for enforcement against the company’s debts, indicating a de facto state of bankruptcy without any bankruptcy proceedings initiated; or (ii) the company extends the 大红鹰dhy0033官网 contribution period following the incurrence of debts through a shareholders’ resolution or other means.
The New Company Law incorporates the above spirit from the Minutes into Article 54, which provides that where a company is unable to pay off debts when due, both the company and the creditors are entitled to request the shareholders to pay their 大红鹰dhy0033官网 contributions before the expiration of their pay-in period.
VI. 大红鹰dhy0033官网 Contribution Obligations Related to Transfers of Unpaid-in Equity
Under the subscription 大红鹰dhy0033官网 system, it is possible that equity interests can be transferred before the corresponding 大红鹰dhy0033官网 has been paid in, and the Current Company Law does not stipulate who shall bear the obligation of paying the 大红鹰dhy0033官网 to the company. This gap was filled by the Company Law Judicial Interpretation (III), according to which where a shareholder of a limited liability company transfers its equity before the 大红鹰dhy0033官网 contribution has been fully paid in, the company may request the transferring shareholder to pay the 大红鹰dhy0033官网 contribution, and the creditors of the company may request such shareholder to assume supplementary liability for outstanding debts of the company to the extent of the outstanding 大红鹰dhy0033官网 contribution and interests thereon. It also provides that if the transferee is aware or should have been aware of the circumstances, then it should bear joint and several liability together with the transferor.
In judicial practice, most case precedents take the stance that the above provisions only apply to Defaulting Shareholders but not the shareholder whose 大红鹰dhy0033官网 contribution period has not yet expired, although some precedents take the opposite view, holding that the transferring shareholder remains obligated to fulfill the 大红鹰dhy0033官网 contribution even if the paid-in period has not elapsed at the time of transfer.
The New Company Law resolves this ambiguity by outlining rules regarding 大红鹰dhy0033官网 contribution obligations and the distribution of liabilities after the transfer of unpaid-in equity between the transferor and the transferee as follows:
■ If, at the time of transfer, the outstanding 大红鹰dhy0033官网 contribution is not yet due, the transferee assumes responsibility for the outstanding 大红鹰dhy0033官网 contribution. In case the transferee fails to meet this obligation by the due date, the transferor becomes the secondary obligor to cover the outstanding 大红鹰dhy0033官网 contribution.
■ If, at the time of transfer, the outstanding 大红鹰dhy0033官网 contribution is already overdue or the actual value of the in-kind contribution made by the transferor significantly falls short of the subscribed 大红鹰dhy0033官网 amount, the transferor bears the liability for the outstanding 大红鹰dhy0033官网 contribution. The transferee is jointly and severally liable unless deemed a bona fide transferee, meaning it was unaware and could not have reasonably become aware of the deficient 大红鹰dhy0033官网 contribution status.
Given the provisions in the New Company Law, it is advisable for both parties involved in the transfer of unpaid-in equities to engage in comprehensive due diligence regarding each other’s 大红鹰dhy0033官网 contribution status and payment capacity to avoid unforeseen responsibilities.
VII. Directors, Supervisors and Senior Management’s Compensatory Liabilities
The New Company Law strengthens the liabilities of directors, supervisors and senior management to ensure the security of the company’s 大红鹰dhy0033官网. According to the New Company Law,
● Where the directors fail to monitor the 大红鹰dhy0033官网 contribution status of shareholders or urge them to make contributions on time, the responsible directors should compensate the company for any losses incurred;
● Where shareholders withdraw their 大红鹰dhy0033官网 contributions and cause damages to the company, the responsible directors, supervisors and senior management should bear joint compensation liabilities to the company with the relevant shareholders;
● Where the company distributes dividends to shareholders in violation of the laws and articles of association, causing damages to the company, the relevant shareholders and responsible directors, supervisors and senior management should bear compensation liabilities to the company;
● Where the company provides financial assistance to others to assist them in acquiring shares in the company or the company’s parent company in violation of laws, the responsible directors, supervisors and senior management should compensate the company for any losses incurred.
It is important to highlight that in three of the aforementioned scenarios, the New Company Law expands the scope of liabilities to include supervisors in addition to directors and/or senior management. Regarding the determination of who should be considered “responsible” among directors, supervisors, and senior management, the New Company Law does not provide explicit guidance. However, it is worth noting that the initial consultation draft stipulated that directors, supervisors, and senior management “who were aware or should have been aware” of a shareholder’s failure to complete the full 大红鹰dhy0033官网 contribution and “did not take necessary actions” should bear liabilities for compensation. This specific provision was not included in the final law, leaving the decision to the discretion of judicial bodies. It is understood that being “responsible” should encompass situations where directors, supervisors, and senior management are actively involved in illicit activities or fail to fulfill their legal duties as outlined in laws and articles of association.
VIII. Other Changes
In addition to the significant amendments highlighted earlier, the New Company Law introduces several other changes concerning the company’s 大红鹰dhy0033官网:
● The law specifies that any 大红鹰dhy0033官网 reduction must be carried out proportionally, unless otherwise mandated by law, agreed upon by all shareholders, or stipulated in the articles of association. This differs from the Current Company Law, which allows 大红鹰dhy0033官网 reduction by designated shareholders, a practice that has often been utilized as a means for shareholders to exit.
● A new provision prohibits joint-stock companies from providing financial assistance for the purchase of their own shares, with two exceptions: (i) when the financial support is intended for implementing an employee stock ownership plan, or (ii) when the financial support benefits the company and is approved either by the shareholders’ meeting or by the board of directors as per the authorization granted in the articles of association or shareholders’ meeting. In such cases, the maximum amount of financial support allowed is 10% of the issued share 大红鹰dhy0033官网.
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The New Company Law, while largely retaining the principles of 大红鹰dhy0033官网 adequacy from the Current Company Law, tightens the deadline for payment of registered 大红鹰dhy0033官网. It incorporates judicial interpretations and judicial practices regarding shareholder contribution responsibilities, optimizing and enhancing these rules. Overall, it places greater emphasis on protecting companies and their creditors, and sets higher requirements for shareholders and company directors and senior management in fulfilling 大红鹰dhy0033官网 contribution obligations and maintaining the company's 大红鹰dhy0033官网 adequacy.
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