Responses to the new Company Law’s timely capital contribution rules

On 29 December 2023, the Standing Committee of the 14th National People’s Congress passed the 2023 revision of the Company Law. Shortly after its release, there was a surge in capital reduction activities, mainly due to the new requirement that registered capital must be fully paid within five years. This article explores the impact of the new Company Law’s capital contribution deadline on different companies and proposes feasible responses.

Registered capital system

China’s Company Law determines the stringency of capital contributions through varying regulations on minimum registered capital and contribution deadlines. Key regulations are summarised as follows.

The 1993 Company Law set the minimum registered capital for various industries at RMB100,000 (USD13,700) to RMB500,000, requiring full payment before establishment. The 2005 Company Law established minimum registered capital of RMB30,000 for limited liability companies (LLCs) and RMB100,000 for one-person companies, with an initial payment of at least 20% of the registered capital, the full amount to be paid within two years, and investment companies required to pay in full within five years.

The 2013 Company Law eliminated minimum capital requirements and contribution deadlines. The 2023 Company Law still does not set a minimum capital requirement but specifies that LLCs must pay in full within five years, and joint-stock companies must pay in full before establishment.

Since the 2013 Company Law, there has been a boom in company formations, but issues with arbitrary subscriptions and lengthy payment periods have led to registered capital losing significance.

The new Company Law’s five-year contribution period reflects a preference for creditor protection, requiring existing companies to adjust to this timeframe. Registration authorities may demand timely adjustments for companies with abnormal contribution amounts or periods.

Legal consequences

According to article 252 of the new Company Law, if the founders or shareholders of a company make false contributions, or fail to deliver on time the monetary or non-monetary assets they pledged, the company registration authority will order corrections and may impose fines ranging from RMB50,000 to RMB200,000.

In severe cases, fines can range from 5% to 15% of the false or unpaid contribution amount. Directly responsible managers and other personnel may also be fined between RMB10,000 and RMB100,000.

In addition to the above-mentioned penalties, if contributions are not fully paid on time, the responsible parties must not only make up the contributions but also compensate for any losses caused to the company. Other shareholders at the time of establishment (founding shareholders) bear joint liability within the scope of their unpaid contributions.

Directors who fail to fulfil their obligations to urge contribution and cause losses to the company are also liable for compensation. Shareholders who still fail to pay after a grace period following a contribution reminder will forfeit their equity rights.

In practice, many real estate companies, due to large amounts of registered capital, often have shareholders contribute funds through loans, recorded as shareholder advances, for cost control, tax considerations, and the ease of a later investor exit. With the new Company Law now requiring capital contributions to be completed within five years, what specific measures can existing companies take to comply?

Practical measures

Substantive capital reduction. Regardless of how the transition period is arranged, the most direct approach is substantive capital reduction. Unlike the simplified capital reduction under the new Company Law for loss-making enterprises, substantive capital reduction involves returning contributions to shareholders.

This reduction is reflected in the company’s balance sheet, where both assets and owner’s equity decrease simultaneously, or liabilities increase while owner’s equity decreases. While the simplified capital reduction is straightforward, it does not exempt shareholders from their obligation to contribute capital. The company can only reduce its registered capital to the extent of its losses.

Non-monetary asset contributions. With the unanimous consent of all shareholders, non-monetary assets such as physical goods, intellectual property, land use rights, shares and claims can be used as capital contributions, provided they can be monetarily valued and legally transferred. Claims are unique as they can be against third parties or the company itself.

Previously, under the now-defunct 2014 Administrative Provisions on the Registration of Companies’ Registered Capital, converting claims into company equity required an increase in registered capital. The new Company Law introduces flexibility here, contingent on the true valuation of non-monetary assets and a thorough assessment of the recoverability of claims.

Share transfers and company dissolution do not exempt shareholders from their capital contribution obligations. The new Company Law stipulates that after a share transfer, the transferee assumes the obligation to make the capital contributions. The transferor bears supplementary liability if the contributions are not made on time.

Therefore, unless specific guarantees for actual capital contributions are included in the transfer price or agreement terms, a simple share transfer does not relieve shareholders of their contribution duties.

According to article 22 of the Provisions of the Supreme People’s Court on Several Issues concerning the Application of the Company Law (II), upon company dissolution, any unpaid capital contributions are considered liquidation assets. If the company’s assets are insufficient to cover its debts, creditors can claim against shareholders with unpaid contributions and other founding shareholders within the scope of their unpaid contributions.

Huang Yaping is a partner at Guantao Law Firm. She can be reached by phone at +86 139 2388 2333 and by email at huangyp@guantao.com
Wang Yating is a partner at Guantao Law Firm. She can be reached by phone at +86 198 0671 7577 and by email at wangyt@guantao.com