The Seventh Meeting of the Standing Committee of the Fourteenth National People’s Congress (NPC) voted on the newly amended Company Law on December 29, 2023. It will come into effect on July 1, 2024. The new Law has made significant changes in style and provisions on the company capital system, corporate governance system, liability and protection of shareholders’ rights and interests in capital contribution, company registration, and corporate bonds. Among them, the new Law improves the contribution registration system by stipulating that the amount of capital contributed by all shareholders shall be fully paid up by the shareholders within five years from the date of establishment of the company by the provisions of the articles of association, and strengthens the institutional constraints on the duration of the shareholders’ capital contribution on the premise of continuing to implement the contribution registration system. The improvement of the contribution registration system is conducive to shareholders’ reasonable consideration of the company’s operating conditions, individual capital contribution ability, and market and industry prospects and will play a positive role in safeguarding transaction security and protecting the interests of creditors.
This article explains the new Law’s main provisions for the contribution system for a limited period and their application.
I. Provisions and application of the system of contribution for a limited period
Article 47, paragraph 1, of the new Company Law, stipulates: “The registered capital of a limited liability company shall be the number of capital contributions subscribed for by all its shareholders as registered with the company registration authority. According to the company’s Law, all shareholders must fully pay the subscribed capital contributions within five years of the company’s formation.
As to applying the above provisions to companies registered and established before the implementation of this Law, the new Company Law further stipulates in Article 266: “This Law shall come into force on July 1, 2024. For companies registered and established before the implementation of this Law, if the period of capital contribution exceeds the period stipulated in this Law unless otherwise provided by laws, administrative regulations, or the State Council, they shall be gradually adjusted to a period within the period stipulated in this Law; for those whose period of capital contribution and amount of capital contribution are abnormal, the company registration authority may require them to adjust them in time by the Law. The State Council shall prescribe the specific implementation methods.” According to this article, the application of the limited-period contribution system can be divided into the following situations:
1. For companies established after the implementation of the New Company Law (for example, companies established after July 1, 2024), such companies were established after the implementation of the New Company Law and are obliged to complete the paid-in registered capital within five years following the provisions of the New Company Law.2. For companies that have been established before implementing the new Company Law. Under this situation, it can be specifically subdivided into two categories:
1) Companies that have been established for more than five years before the implementation of the new Company Law (for example, companies established before July 1, 2018) and have not completed the payment of paid-in capital;2) Companies that have been established before the enforcement of the new Company Law but have not yet completed five years (for example, a company established from July 1, 2018, to June 30, 2023), whose articles of incorporation stipulate that the period for making capital contributions is more than five years and has not yet completed the payment of paid-in capital.
Both of these situations fall under Article 266 of the new Company Law, which reads, “If the period of capital contribution of a company registered and established before the implementation of this Law exceeds the period prescribed by this Law,” the capital contribution shall be “gradually adjusted to within the period prescribed by this Law” by the provisions of this Law.
The new Company Law gives the companies mentioned above the space for “gradual adjustment”, a transitional period after implementing the new Law for shareholders to make adjustments after full consideration and agreement. According to the “Provisions of the State Council on the Implementation of the Company Law of the People’s Republic of China on the Registration and Administration System of Registered Capital” (Draft for Public Comments), the transitional period of the new Law is three years, during which limited companies can adjust the remaining period of capital contribution to five years. Joint-stock companies can fully pay the subscribed shares during the transitional period.
3) For companies with clearly abnormal contribution periods and amounts.
According to the new Company Law, for such companies, “the company registration authority may, by the law, require them to make timely adjustments”. According to the provisions of the State Council’s Provisions on the Implementation of the Company Law of the People’s Republic of China on the Administration System for the Registration of Registered Capital (Draft for Public Comments), for companies with a capital contribution period of more than thirty years or a capital contribution of more than RMB 1 billion, the company registration authority may combine the shareholders’ ability to make capital contributions, the main project, the scale of assets and other circumstances to examine the authenticity of the registered capital, and to determine that there is indeed an obvious abnormality in the period of capital contribution and capital contribution. Suppose there is any obvious abnormality in the amount of capital contribution, with the consent of the provincial market supervision and management department. In that case, the company can be required to adjust the period of capital contribution and the amount of capital contribution within six months according to the Law. On the other hand, in addition to changing the capital contribution period, shareholders should also assess the ability to contribute, if necessary, through the capital reduction program to reduce the amount of capital contribution.
II. Provisions and application of the expedited capital contribution system
Article 54 of the new Company Law adds a clause to require expedited capital contribution when the company is unable to pay its debts when due, “Where a company is unable to discharge debts when they become due, the company or creditors to whom the due debts are owed shall have the right to require shareholders who have subscribed for capital contributions to pay the capital contributions before the expiration of the period of payment of capital contribution.”
According to the above provisions, the prerequisite for applying this clause is that “the company is unable to pay its debts as they fall due”. Although the New Company Law does not make any particular explanation in this regard, adhering to the principle of consistency, the criterion of “inability to pay its debts as they fall due” herein can refer to Article 2 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People’s Republic of China (I) (“Judicial Interpretation 1 of the Bankruptcy Law”): “Where all of the following conditions are met, the people’s court shall determine that a debtor is unable to repay a due debt: 1) The debt relationship has been legally established; 2) The time limit for repayment of the debt has expired; and 3) The debtor has not fully repaid the debt. Therefore, as long as the above three conditions are met, the company or creditors have the right to demand that shareholders who have subscribed to the capital but have yet to reach the end of the capital contribution period pay the capital contribution in advance.
It should be noted in particular that, under the premise of meeting the condition of “the company is unable to pay its debts as they fall due”, after the implementation of the new Company Law, the company or the creditors do not need to prove that the debtor meets the conditions of insolvency, for example, Article 2 of the Insolvency Law stipulates that: “Where an enterprise legal person fails to clear off its debt as due, and if its assets are not enough to pay off all the debts or if it is incapable of clearing off its debts, its liabilities shall be liquidated according to the provisions of the present Law. “Article 54 of the New Company Law further makes a conditional breakthrough based on the 5-year deadline standard under the system of contribution for a limited period, whereby the shareholders’ obligation to make contributions may be accelerated due to the company’s failure to settle its due debts, for example, the shareholders do not necessarily enjoy the benefit of the 5-year deadline before they are required to make the contributions, and if the company is liable for its due debts, The company or creditors have the right to demand that the shareholders fulfill their obligation to pay the capital contribution in advance if the capital contribution period has not reached five years.
III. Liability of shareholders for failure to make contributions on time
Article 49 of the new Company Law stipulates that “Each shareholder shall make full payment for the capital contributions he has subscribed to according to the by Law. ...... Where a shareholder fails to make his capital contribution within the specified period, he shall not only make his capital contribution in full to the company but also bear the liabilities for the losses caused to the company.”
In addition, Article 252 of the new Company Law stipulates, “If a promoter or shareholder of a company makes a false capital contribution and fails to deliver, or fails to deliver on schedule, the monetary or non-monetary property used as a capital contribution, the company registration authority shall order rectification, and may impose a fine of not less than RMB 50,000 and not more than RMB 200,000; if the circumstances are serious, the company shall be imposed a fine of not less than five percent of the amount of the false capital contribution or the amount of the outstanding capital; and a fine of not less than RMB 10,000 and not more than RMB 100,000 shall be imposed on the directly responsible supervisors and other directly responsible persons.”
According to the above provisions, under the new Company Law, if a shareholder fails to make a capital contribution on time, in addition to paying the total amount to the company, he/she shall also be liable for the losses caused to the company. In addition, they may be ordered by the company registration authority to make corrections and be fined from RMB 50,000 to RMB 200,000; if the circumstances are severe, they may be fined from 5 percent to 15 percent of the amount of the unpaid capital, and so on.
Conclusion
Under the new Company Law, the implementation of the system of contribution for a limited period will, on the one hand, extensively regulate the contribution behavior of shareholders, fully stimulate the vitality of business entities, protect the security of transactions, and help to create an honest and trustworthy market environment; on the other hand, it will also bring pressure to shareholders who have difficulties in their operations to pay their contributions.