In the first of a new series on China’s new Company Law, Marco Vinciguerra from HFG Law & Intellectual Property explores changes related to capital contribution obligations
After a long revision process, on 29 December 2023, the Standing Committee of the National People’s Congress issued the new Company Law, 30 years after the first company law was enacted.
The new Company Law will come into effect on 1 July 2024, introducing numerous changes and innovations. The new law consists of 266 articles, of which about one-third have been added or substantially modified.
This new series from HFG focuses primarily on the provisions applicable to Chinese limited liability companies (LLCs), as this is the corporate type most often adopted for foreign investments in China. Of course, the new law also touches upon provisions applicable to the other commonly used corporate type, joint stock companies.
This first article focuses on the most significant change to the Company Law: the introduction of the general obligation for the shareholders to pay in the subscribed capital within five years from the establishment of the company.
How capital contribution obligations will change under the new Company Law
Under the current provisions, there is no general obligation to pay capital within a specified period, nor does a general minimum capitalisation requirement generally exist. The amount of the social capital and the terms and conditions of its payment are left to the free determination of the shareholders, as expressed in the company’s articles of association.
However, from 1 July of this year, the rules will change: whether upon establishment or capital increase of a company, the subscribed share capital must be paid in within the maximum period prescribed by the law (or within the specified terms if a payment by instalments has been agreed to).
LLCs will also be obliged to publish not only their registered share capital, but also the amount of share capital actually paid in (as well as the terms and conditions of contribution) in the National Enterprise Credit Information Publicity System.
At present, the only existing transitory provision of the Company Law states that companies already established at the time of the entry into force of the new law are required to make gradual adjustments to comply with the new terms set by the law. The Company Law then expressly indicates that the State Council will issue implementation regulations in this regard.
The new regulations have codified a previous judicial practice, and now prescribe that if a shareholder does not contribute the subscribed capital within the specified term and for the specified amount, in addition to the liability of such defaulting shareholder towards the company for any damages caused by such default, there is also a joint liability of the other founding shareholders for the portion of capital not contributed by the defaulting shareholder.
This means that an unsatisfied creditor could seek compensation not only against a shareholder that has not fully or punctually contributed its share capital, but also against the other founding shareholders within the limit of the amount not contributed.
It is now expressly provided for that it is the responsibility of the directors to call, by way of a written request, for the defaulting shareholders to pay in the subscribed capital. The regulations in this regard make the directors liable to the company for any losses caused by their failure to fulfil this obligation to call for the contribution of the subscribed capital.
In the written call to defaulting shareholders, the directors may establish a “grace period” (not shorter than 60 days) within which the defaulting shareholders must remedy.
After the grace period expires without remedy, the company may, by resolution of the board of directors, send a written notice of forfeiture of the shareholder’s rights regarding the portion of the unpaid share capital, meaning that there will be either a transfer of such shares or their cancellation (and, consequently, a reduction of the company’s share capital).
If the portion of the share corresponding to the unpaid capital is not transferred or cancelled within six months from when the forfeiture notice is sent out, the law says that the other shareholders will be obliged to contribute the missing capital in proportion to their respective shares.
A note on accelerated payment
The new regulations also provide for a case of accelerated payment of share capital (compared to the term initially agreed to). Where the company is insolvent before the deadline for the contribution of the share capital, the company itself or its creditors may request the shareholders to pay the subscribed capital before the expiry of the term indicated in the articles of association.
