February 2024
Jolene Chen and Teresa Huang
On December 29, 2023, the 7th meeting of the 14th Standing Committee of the National People’s Congress passed the newly revised Company Law of the People’s Republic of China (hereinafter referred to as the “New Company Law”), which will be officially implemented on July 1, 2024. The New Company Law provides a more comprehensive and powerful legal protection for creditors through the design of a series of specific systems, which will promote the honest operation of market entities, reduce the risks of creditors, and enhance market stability and fairness. This article will interpret the revision of the three key clauses in order to provide some inspiration for market entities and creditors.
I. Establishing a five-year subscription system for limited liability companies
Article 47 of the New Company Law restricts the period for shareholders of limited liability companies to make capital contributions, stipulating that it shall not exceed five years. This change enhances the obligation of shareholders to contribute capital and strengthens the protection of creditors’ rights and interests by setting clear payment periods. Since the implementation of the reform of subscription registration system in 2013, some shareholders have promised a huge amount of subscribed capital and a long payment period, which has led to a decrease in the trust of creditors in the company’s registered capital in recent years. Now, by setting a maximum payment period of five years, shareholders will be more cautious in considering the company’s operational needs and investment risks when determining their capital contribution obligations, while also better meeting the reasonable expectations of creditors for repayment. However, the adjustment method for the payment deadline of companies that already existed before the New Company Law came into effect is still uncertain. According to Article 266 of the New Company Law, the State Council will formulate specific adjustment measures separately. Therefore, we shall maintain our focus on relevant legislative developments to obtain the latest information.
| Current Company Law | New Company Law |
|
Article 26: The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all its shareholders as registered with the company registration authorities. Where the laws, administrative regulations and the State Council decisions stipulate otherwise on the actual payment of registered capital and the minimum amount of registered capital of limited liability companies, such provisions shall prevail.
|
Article 47: The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all the shareholders as registered with the company registration authority. The amount of capital contributions subscribed for by all the shareholders shall, according to the articles of association, be fully paid up by the shareholders within 5 years since the date of establishment. Where the laws, administrative regulations and the State Council decisions stipulate otherwise on the actual payment of registered capital, the minimum amount of registered capital and the time limit for capital contributions by shareholders of a limited liability company, such provisions shall prevail. Article 266: This Law shall come into force on July 1, 2024. For the companies already registered for establishment before this Law comes into force, if their capital contribution period exceeds the period stipulated herein, such period shall be gradually adjusted to within the period prescribed in this Law, unless otherwise provided by laws, administrative regulations or the State Council; For the period of capital contribution or the amount of capital contribution that is obviously abnormal, the company registration authority may require adjustment in a timely manner in accordance with the law. The specific implementing methods shall be prescribed by the State Council. |
II. Adding new accelerated maturity system for shareholder capital contributions
Article 54 of the New Company Law adds a new accelerated maturity system for shareholders’ capital contributions, which will further strengthen the protection of company creditors and ensure that they can receive timely and effective relief when the company is unable to repay its due debts. Under the subscribed capital system, when a company is unable to pay off its maturing debts, the issue of whether the unexpired capital contribution period of shareholders’ capital contributions should be expedited has triggered extensive discussions in recent years. The position held by the Supreme People’s Court on the issuance of the “Minutes of the National Court Work Conference for Civil and Commercial Trial ” (hereinafter referred to as the ” the 9th Supreme People’s Court Minutes”) is that shareholders should, in principle, enjoy the benefits to make their capital contributions within the specified period, and their capital contributions should not be accelerated. However, there are two exceptions: first, the company meets the conditions for bankruptcy but fails to apply for bankruptcy; secondly, after the debt incurred, the company extended the shareholder’s contribution period. The New Company Law has directly made clear provisions on this issue, providing a clear basis for judicial judgments. According to the New Company Law, the conditions for accelerated maturity are simplified to: as long as the company cannot pay off its due debts. It does not need to meet other additional conditions. This change better safeguards the rights and interests of the company and creditors. However, further explanation and clarification are needed on how to specifically define the situation where a company is unable to pay off its due debts.
| Current “ the 9th Supreme People’s Court Minutes “ | New Company Law |
|
6. [Whether Maturity of Shareholders’ Capital Contribution can be Accelerated] Under the subscription system of the registered capital, the shareholders shall be entitled to the benefits during the prescribed period in accordance with law. Where any creditor claims against the shareholders whose capital contributions have not expired to bear supplementary compensation liabilities for the debts that the company is unable to repay beyond the scope of capital contribution on the ground that the company is unable to repay due debts, the people’s court shall not uphold such claim. However, exception shall be made for the following situations: (1) Where the company is subject to compulsory enforcement in a case in which the people’s court has taken all enforcement measures but there is no property available for enforcement and the company meets the conditions for bankruptcy but fails to apply for bankruptcy; or (2) The period for capital contribution by the shareholders is extended by resolutions made by company’s shareholders’ (general) meeting or by other means after the incurrence of the company’s debts. |
Article 54: Where a company is unable to pay off the due debts, the company or the creditors of the due credits may request the shareholders who have subscribed for the capital contributions but whose time limit for capital contributions has not expired to make capital contributions in advance.
|
| Business Bankruptcy Law | |
| Article 35: Where a capital contributor of the debtor, upon acceptance of a bankruptcy application by a People’s Court, has yet to perform its capital contribution obligation, the administrator shall request the capital contributor to make the contribution for the subscribed capital and such a request for capital contribution shall not be subject to any time limit restrictions. |
III. Adding a system of horizontal personality denial for companies
Article 23 of the New Company Law has added a horizontal personality denial system at the legal level, which clarifies that creditors can demand joint and several liabilities between affiliated companies that have lost their personal independence and have mixed personalities. This system originates from the Guiding Case No .15 of the Supreme People’s Court in 2013, in which the Supreme People’s Court held that if the personnel, business, finance, and other aspects of affiliated companies intersect or are mixed, resulting in the inability to distinguish their respective assets and the loss of independent personality, it constitutes confusion of personalities. If the personalities of affiliated companies are mixed and the interests of creditors are seriously harmed, the affiliated companies shall bear joint and several liabilities for external debts. In the subsequent the 9th Supreme People’s Court Minutes, a detailed discussion on this situation was also discussed, but it was clearly stated that the 9th Supreme People’s Court Minutes was not a judicial interpretation and cannot be cited as a basis for judgment. However, the revision of the New Company Law officially incorporates the rule of horizontal personality denial into legal provisions, which not only reflects country’s great emphasis on the protection of the interests of creditors, but also provides clearer legal basis and protection for corporates’ creditors. This change is undoubtedly good news for the company’s creditors, and further enhances the protection of creditors’ rights and interests in transactions with the company.
| Current Company Law | New Company Law |
|
Article 20: Shareholders of the company shall abide by laws, administrative regulations, and the company’s articles of association, exercise shareholder rights in accordance with the law, and shall not abuse shareholder rights to harm the interests of the company or other shareholders; It is not allowed to abuse the independent status of the company’s legal personality and the limited liability of shareholders to harm the interests of the company’s creditors. If shareholders of a company abuse their shareholder rights and cause losses to the company or other shareholders, they shall bear compensation liability in accordance with the law. If a company’s shareholders abuse the independent status of the company’s legal personality and the limited liability of shareholders, evade debts, and seriously harm the interests of the company’s creditors, they shall bear joint and several liabilities for the company’s debts. |
Article 23: Where any shareholder of a company evades the debts by abusing the independent status of the company’s legal personality or the limited liability of shareholders and thus seriously damages the interests of any creditor of the company, it shall be jointly and severally liable for the debts of the company. Where a shareholder commits any of the acts as mentioned in the preceding paragraph by using two or more companies under its control, each company shall be jointly and severally liable for the debts of any company. In the case of any company with only one shareholder, if the shareholder is unable to prove that the property of the company is independent from its own property, it shall be jointly and severally liable for the debts of the company. |
|
Current ” the 9th Supreme People’s Court Minutes “ |
|
|
11.[Excessive Dominance and Control] If the controlling shareholders of a company excessively dominate and control the company, manipulate the decision-making process of the company, make the company completely lose independence, become a tool or body of the controlling shareholders, and seriously damage the interests of the company’s creditors, the company’s personality should be denied, and the shareholders who abuse controlling power should bear joint and several liabilities for the company’s debts. Common situations in practice include: (1) Transfer of benefits between parent and subsidiary companies or between subsidiaries; (2) Transactions between parent and subsidiary companies or between subsidiaries, where profits belong to one party but losses are borne by the other party; (3) Withdrawing funds from the original company first, and then establishing a company with the same or similar business purposes to evade the debts of the original company; (4) Dissolving the company first, and then establishing a new company with the original company premises, equipment, personnel, and the same or similar business purposes to evade the original company’s debts; (5) Other situations of excessive domination and control. If a controlling shareholder or actual controller controls multiple subsidiaries or affiliated companies, abuses controlling power, causes unclear property boundaries, financial confusion, mutual benefit transmission, loss of personal independence among the multiple subsidiaries or affiliates companies, and causes these subsidiaries or affiliated companies become tools for the controlling shareholder to evade debt, engage in illegal operations, or even commit illegal crimes, the legal personality of the subsidiaries or affiliated companies can be denied based on the facts of the case, and joint liability can be ordered. |
|
|
2013 Supreme Court Guiding Case No .15: Xugong Group Construction Machinery Co., Ltd. v .Chengdu Chuanjiao Industry and Trade Co., Ltd. sales contract disputes |
|
|
Key points of the judgment 1. If the personnel, business, finance, and other aspects of affiliated companies intersect or mix up, resulting in the inability to distinguish their respective assets and the loss of independent personality, it constitutes personality confusion. 2. If the personalities of affiliated companies are mixed and the interests of creditors are seriously harmed, the affiliated companies shall bear joint and several liabilities for external debts. |
The contents of all newsletters of Shanghai Lee, Tsai & Partners (Content) available on the webpage belong to and remain with Shanghai Lee, Tsai & Partners. All rights are reserved by Shanghai Lee, Tsai & Partners, and the Content may not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior permission of Shanghai Lee, Tsai & Partners.
The Content is for informational purposes only and is not offered as legal or professional advice on any particular issue or case. The Content may not reflect the most current legal and regulatory developments. Shanghai Lee, Tsai & Partners and the editors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The contributing authors’ opinions do not represent the position of Shanghai Lee, Tsai & Partners. If the reader has any suggestions or questions, please do not hesitate to contact Shanghai Lee, Tsai & Partners.