The New Company Law: Part One - Capital Contribution

After a long revision process, on 29th December 2023, the Standing Committee of the National People's Congress issued the new Company Law, thirty years after the first law on the matter was enacted.

The new Company Law will come into effect on 1st July 2024, introducing numerous changes and innovations compared to the previously applicable rules.

The new law consists of 266 articles, of which about one third have been added or substantially modified. It, therefore, can be considered a mini-reform of the legal framework applicable to companies in China.

In this review, we will analyse the most significant changes in the Company Law, dividing them by topic and focusing on their expected impact on the business activities and corporate organization of foreign-invested companies already present in China. In subsequent articles, we will examine and comment on innovations related to shareholders, legal representatives, administrators, supervisors, and senior managers.

We will dedicate our attention primarily to the provisions applicable to Chinese Limited Liability Companies (LLCs), as this is the most adopted corporate type for foreign investments in China. Of course, the new law also touches upon the provisions applicable to the other commonly used corporate type, the Joint Stock Companies.

However, the provisions of the new Company Law are not sufficient to fully outline the new regulatory framework. As indicated in the Company Law itself, further integration and clarification will be needed. These will be provided, on the one hand, by secondary legislation (already announced in the Company Law, but not yet developed) and, on the other hand, by the future judicial and administrative application of the new regulations.

These integrations and clarifications are particularly necessary with regard to some parts of the new Company Law that already raise doubts as to their interpretation and or application.

Capital Contribution Obligation

The most significant change is the introduction of the general obligation for the shareholders to pay in the subscribed capital within five years from the establishment of the company.

Under the current provisions, there is no general obligation to pay the capital within a specified period, nor does a general minimum capitalization requirement generally exist. The amount of the social capital and the terms and conditions of its payment are indeed left to the free determination of the shareholders, as expressed in the company's articles of association.

From 1st 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 installments 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 this stage, 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 is to 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 the shareholder who has not fully or timely 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, 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 fulfill 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 canceled 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.

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 subscribe capital before the expiry of the term indicated in the articles of association.

(to be continued)