Serials Research Part Five on the New Systems under the New Company Law: Evolution and Judicial Application of Shareholders’ Capital Contribution Liability Rules after the Equity Transfer under the Old and New Company Law Systems (Mainland China)

Under the 2018 Company Law system, there were no explicit legal provisions regarding the assumption of capital contribution obligations after equity transfers.  In judicial practice, such disputes were primarily resolved based on Article 18 of the Provisions of the Supreme People's Court on Several Issues Relating to the Application of the Company Law (III).  According to this article:
 

“Where any shareholder of a limited liability company fails to fulfill or fully fulfill its obligation of capital contribution, but transfers its equity, and the transferee knows or should have known, if the company claims that the shareholder shall fulfill its obligation of capital contribution and the transferee shall bear joint and several liability therefore, the people's court shall support such claim.”
 

However, judicial practice has revealed significant limitations in this provision.  In cases such as (2021) Supreme Court Civil Petition No. 1080 and (2020) Supreme Court Civil Petition No. 5769, the Supreme People’s Court clarified that a shareholder’s failure to fulfill or fully fulfill their obligation of capital contribution refers to a situation where the capital contribution period has already expired.  If the shareholder transfers equity before the expiry of the capital contribution period, it does not constitute a failure to fulfill the obligation.  The shareholder retains the benefit of the capital contribution period and is not required to contribute capital before the expiry of the capital contribution period.  This indicates that under the old Company Law system, transferors who transfer equity before the expiration of the subscribed capital contribution period are, in principle, not liable for the contribution liability.
 

A. To address the abuse of the capital contribution period under the registered capital subscription system, Article 6 of the Notice of the Supreme People's Court on Issuing the Minutes of the National Court Work Conference for Civil and Commercial Trials established two exceptions:
 

Under the subscription system of the registered capital, the shareholders shall be entitled to the benefits within the capital contribution period in accordance with the law.  Where any creditor claims against the shareholders whose capital contribution periods have not expired to bear supplementary compensation liabilities for the debts that the company is unable to repay within the scope of capital contribution on the grounds that the company is unable to repay due debts, the people's court shall not uphold such a claim.

1. Where the company is subject to execution in a case in which the people's court has taken all execution measures but there is no property available for execution, 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 at the company's shareholders' (general) meeting or by other means after the incurrence of the company's debts.

According to Paragraph 1 of Article 28 of the Company Law—‘The shareholders shall make their respective capital contributions in accordance with the amount of their subscribed capital and the schedule stipulated in the articles of association of the company.’—shareholders enjoy the benefit of the capital contribution period before its expiration.  Therefore, a shareholder’s failure to fulfill or fully fulfill their obligation of capital contribution within this period does not constitute a breach of the capital contribution obligation.  A shareholder who transfers equity prior to the expiration of the capital contribution period is not jointly and severally liable for the company's outstanding debts within the scope of the unpaid capital contribution unless the shareholder:

“Where a shareholder transfers the equities for which capital contributions have been subscribed but the time limit for capital contribution has not expired, the transferee shall bear the obligation of making such capital contribution.  If the transferee fails to make a capital contribution on time and in full amount, the transferor shall bear the supplementary liability for the overdue capital contribution of the transferee.”
 

This provision marks a breakthrough from the old Company Law system.  It stipulates that after the transfer of equity for which the capital contribution period has not yet expired, if the transferee fails to contribute in full and on time, the transferor shall bear supplementary liability regardless of whether there was malicious intent.  It significantly strengthens the legislative orientation toward creditor protection.

The Supreme People’s Court once stipulated in Article 4, Paragraph 1 of the Several Provisions of the Supreme People's Court on the Application of the Temporal Effect of the Company Law that Article 88 of the new Company Law could be applied retroactively.  However, the Legislative Affairs Commission of the National People’s Congress deemed this provision violated Article 104 of the Legislative Law.  Ultimately, the Supreme People’s Court issued the Reply to the Non-retroactive Application of Article 88 (1) of the Company Law, clarifying that:
 

“Article 88(1) of the Company Law, implemented effective as of 1 July 2024, shall only apply to equity transfers occurring after July 1, 2024, before the expiry of the contribution period.  Disputes over capital contribution liability arising from equity transfers by shareholders within the capital contribution period before July 1, 2024, shall be dealt with by the people's courts in a fair and impartial manner pursuant to the intention of the provisions of the old Company Law and other relevant laws.”
 

This legislative transition indicates that equity transfers occurring before the implementation of the new Company Law shall still be governed by the rules of the old Company Law.  In principle, the benefit of the capital contribution period enjoyed by shareholders shall be respected.  Transferors are only held liable under exceptional circumstances, such as malicious evasion of debt or company bankruptcy.
 

Article 88 of the new Company Law reflects a legislative orientation that strengthens creditor protection.  After the transfer of equity with an unexpired capital contribution period, if the transferee fails to make a capital contribution on time and in full amount, the transferor shall bear the supplementary liability regardless of whether there is malicious intent.  However, this provision only takes effect for equity transfers occurring after July 1, 2024.  This approach aims to protect the reasonable expectations of the parties and to avoid imposing unforeseen liabilities arising from the retroactive application of the law.