The changes in the registered capital system under the new Company Law

Ning Zhu

Chance Bridge Law Firm, Beijing

ning.zhu@chancebridge.com

Xueyan Li

Chance Bridge Law Firm, Beijing

xueyan.li@chancebridge.com

Introduction

The Company Law of the People's Republic of China (the ‘Company Law’) is the fundamental legislation that governs the socialist market economy system. Since its initial publication on 29 December 1993, the Company Law has undergone five revisions or amendments. The sixth revision of the Company Law (the ‘New Company Law’) commenced in 2019. Following four discussions by the Standing Committee of the National People's Congress (the ‘NPC Standing Committee’) and extensive consultation with various sectors of society, the latest draft was formally reviewed and approved on 29 December 2023. It is scheduled to come into force on 1 July 2024.

The amendments to the Company Law are significant and comprehensive. Notable changes include revising the registered capital system by mandating that the registered capital of limited liability companies be fully paid within five years. The amendments also improve the set-up and clarify the responsibilities of company organisational structures. They regulate the duties and accountabilities of controlling shareholders, actual controllers, directors, supervisors and senior management. Additionally, the amendments specify the procedures for shareholder removal, establish a liability recovery system for legal representatives and reinforce the duties of loyalty and diligence for directors, supervisors and senior management. Furthermore, the amendments optimise the processes for company establishment and exit, making them more efficient and streamlined.

This essay will focus on the key aspect of the New Company Law, namely the alteration of the registered capital system. The amendments to the registered capital system of the New Company Law have several implications. Of particular note is the potential for a significant impact on founders and investors. These include enhancements to the registered capital contribution system, specification of conditions for defective shareholders' capital contribution and shareholders' disqualification, introduction of an accelerated capital contribution system for shareholders and revision of the company's capital reduction system. This essay will utilise the authors’ extensive practical expertise in the investment and financing domain to analyse the critical aspects of the new Company Law regarding alterations to the registered capital system systematically and purposefully. Furthermore, this essay will propose constructive suggestions and recommendations for founders and investors on navigating the changes introduced by the new Company Law.

The evolution of the registered capital subscription system

In accordance with the 1993 Company Law, the registered capital must be paid-in capital and demands that the full registered capital be paid in one sum before the company may be established[1]. Subsequently, in 2005, the registered capital system was amended to relax the restriction on paid-in capital; according to Company Law, the registered capital could be paid up in instalments, but the first instalment should not be less than 20 per cent of the registered capital[2]. However, a significant amendment was made to the Company Law in 2013 whereby the registered capital is no longer required to be paid-in capital but may be subscribed capital. Furthermore, the shareholders may promise the maximum amount of capital that will be contributed to the company and subsequently pay it in full at a later date. Article 26:

‘The registered capital of a limited liability company shall be the amount of capital contribution subscribed by all its shareholders who are registered with the company registration authorities. Where the laws, administrative regulations and the State Council decisions stipulate otherwise on paid-up registered capital and the minimum amount of registered capital of limited liability companies, such provisions shall prevail.[3]’

Furthermore, the limitations on the proportion of the initial instalment and the duration of the contribution period were revoked. Finally, the New Company Law revised the registered capital system, introducing additional constraints.

The New Company Law's restrictions on the Registered Capital Subscription System

Limitations on the period of contribution

According to Article 47 of the New Company Law:

‘The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all the shareholders as registered with the company registration authority. The amount of capital contributions subscribed for by all the shareholders shall, according to the articles of association, be fully paid up by the shareholders within five years as of the date of establishment.’

Where it is otherwise provided for in any law, administrative regulation or decision of the State Council on the actual payment of registered capital, the minimum amount of registered capital and the time limit for capital contributions by shareholders of a limited liability company, such provisions shall prevail.[4]

This article maintains and enhances the subscribed capital contribution system while addressing practical risks. These include instances where shareholders exploit the term advantage and extend the contribution period unnecessarily, which compromises transaction security and disadvantages the interests of creditors. In general, shareholders are required to be fully paid up within five years of the date of establishment, however, the Article 47 allows for one exceptional case regarding the contribution period: legislation, administrative regulations or decisions of the State Council provide otherwise. Additionally, the articles of association may also set limits on the contribution period, but may only set a period shorter than five years.

However, it is necessary to determine the appropriate measures to be taken with regard to registered and established corporations prior to the enforcement of the New Company Law and the setting of a contribution period exceeding five years. The New Company Law considers the pertinent circumstances and specifies a designated period of transition. Article 266:

‘For the companies already registered for establishment before this Law comes into force, if their capital contribution period exceeds the period stipulated herein, such period shall be gradually adjusted to within the period prescribed in this Law, unless otherwise provided by laws, administrative regulations or the State Council; For the period of capital contribution or the amount of capital contribution that is obviously abnormal, the company registration authority may require adjustment in a timely manner in accordance with the law. The specific implementing methods shall be prescribed by the State Council.’[5]

Regarding the three-year transition period, the Provisions of the State Council on Implementation of the Registered Capital Management System under the Company Law of the People's Republic of China (Provisions) has set specific measures for companies registered before the New Company Law coming into force. According to the Provisions, the period shall commence on 1 July 2024 and conclude on 30 June 2027.[6] It will be gradually modified to align with the duration specified in the New Company Law. The limited liability company has the option to shorten the length of the capital contribution to fewer than five years during the transition period. If companies could pay the capital contribution before 30 June 2032, it would fulfil the requirements. Simultaneously, it is evident that limited liability companies with a contribution period of fewer than five years remaining as of 1 July 2027 are exempt from making adjustments to their contribution period.[7] Furthermore, Company Limited by Shares shall fully settle the subscribed shares before 30 June 2027.[8]

Registered capital disclosure system

Furthermore, the new Company Law has introduced a compulsory paid-in capital disclosure system, besides the restrictions on the period of capital contribution.[9] The National Enterprise Credit Information Publicity System requires the disclosure of a range of information, including the amount of capital contributed and paid in, the method and date of capital contribution by shareholders of a limited liability company, and the number of shares subscribed by promoters of a company limited by shares.

Significance of the relevant restrictions and penalties for breach

Significance of the restrictions

The shareholder's fully paid-up capital contribution is crucial for determining and maintaining the company's capital, ensuring stable operations and market order, and promoting fair and secure market transactions. The New Company Law includes comprehensive and explicit provisions regarding the liability of shareholders who fail to meet their obligations to contribute paid-in capital. Its objective is to enhance shareholders' understanding of their responsibilities through legal measures, guarantee the complete capitalisation of the company, and uphold the integrity and security of market transactions. Consequently, it is imperative that shareholders adhere rigorously to pertinent legislation and regulations and fulfil their capital obligations promptly and thoroughly. This will collectively foster the sound growth of the company and facilitate the seamless execution of market transactions.

Relevant penalties

In accordance with Articles 49, Articles 52 and Articles 250 of the New Company Law, shareholders will be subject to multiple liabilities for failing to make full contributions on time[10]. The primary obligation of a shareholder is to fulfil the capital contribution obligation in full and to compensate the company for any loss caused by the shareholder's failure to do so. In the event that a shareholder fails to fulfil the capital contribution obligation, the company registration authority has the right to order the shareholder to rectify the situation and may impose a fine. Finally, shareholders may also lose their rights as shareholders as a result. Compared to the 2018 Company Law, the revised legislation introduces provisions pertaining to administrative liability for shareholders who fail to fulfil their capital contribution obligations promptly. Furthermore, the revised legislation enhances the system of shareholders' loss of rights in the event of late capital contributions, rendering the relevant procedures more specific and feasible. These amendments reflect China's unwavering commitment and the country's ongoing development trajectory of strengthening the accountability of shareholders for capital contributions at the legislative level.

Response to the changed system of registered capital contribution by shareholders

A comprehensive examination of the amendments to the New Company Law reveals that the founding shareholders and investors should be particularly concerned. It is of paramount importance to determine the registered capital of the company prudently and meticulously, taking into account the current business demands and future expansion plans. This will help to prevent the setting of unrealistic targets that shareholders are unable to attain. In the event that a company encounters the issue of an inflated registered capital, which has already been established, it is imperative that the amount of registered capital be promptly decreased by legal means, such as capital reduction, before the implementation of the New Company Law. This would not only align the registered capital of the company with its real working conditions and improve its financial stability but also alleviate the burden of paid-in capital on shareholders and investors.

Conclusion

In short, a significant part of the New Company Law amendment focuses on the registered capital contribution system. It restricts the period for contributing registered capital from not exceeding five years. The restrictions prevent shareholders from exploiting the time limit for their benefit. So, it reinforces the principle of capital enrichment. In addition, a new requirement for the disclosure of paid-in capital has been implemented, transforming the disclosure of the amount of paid-in capital from an optional choice to a compulsory obligation for the companies. To conclude, the revision of the New Company Law has introduced more stringent criteria for founding shareholders and investors. To preserve the rationality and validity of the registered capital of the company and safeguard the interests of the company and its shareholders, it is necessary to handle the relevant modifications cautiously and take into account a variety of different aspects.