The Company Law (Revised in 2023) (“Company Law 2023”) was officially passed on December 29, 2023, and will come into effect on July 1, 2024. Company Law 2023 sets new standards on the registered capital, organizational structure, transfer of shares, profit distribution, etc. This article focuses on changes regarding the flow of funds in the entire life of a limited liability company (“Company”).
1. Timeframe for Capital Contribution
According to Articles 47 and 228 of Company Law 2023, shareholders need to fully contribute their subscribed capital within five years upon establishment of the Company, which requirement also applies to any increase of the registered capital. Such changes might discourage investors from setting up the registered capital at a high level, and shareholders of existing companies might consider reducing the registered capital to a reasonable level.
2. Responsibility for Unpaid Contributions
Company Law 2023 no longer imposes liabilities on shareholders who don’t make their capital contributions on time and in full amount. Instead, it explicitly stipulates that the aforementioned shareholders shall compensate for any losses suffered by the Company in this regard. That being said, Company Law 2023 does not define how to calculate the losses or who is entitled to make the claim.
On a related note, Company Law 2023 imposes joint and several liabilities on shareholders that conform to their capital-contributing obligations to the extent of insufficient capital contributions of failing shareholders, which adds another layer of obligation on conforming shareholders.
3. Capital Contribution Verification and Deprival of Identity
Pursuant to Company Law 2023, the board of directors shall verify capital contributions of shareholders, and shareholders who are unable to make sufficient contributions within corrected time period might be subject to deprival of their identity as shareholders. However, Company Law 2023 does not clarify whether the above policy applies under the circumstance of shareholders’ illegal withdrawal of contributions.
It is worth noting that the board of directors, rather than the shareholders’ meeting, has the right to determine the deprival of shareholders’ identity. Whether the board of directors is in a position to make such determination is questionable, considering that directors are appointed on the board by shareholders in the first place.
4. Advance Capital Contribution Obligations
Company Law 2023 stipulates that where a Company is unable to pay off its due debts, the Company or creditors of the due credits may request shareholders to make capital contributions in advance. Compared to previous regulations, Company Law 2023 triggers shareholders’ advance contribution obligation to a wider parameter and provides creditors with a broader scope of protection.
5. Equity Transfer Rules
Article 88 of Company Law 2023 provides that when a shareholder transfers equity interests to a transferee prior to the due date for capital contribution relating to such equity interests, the primary liability for contribution lies with transferee. Provided that transferee fails to fulfill capital contribution obligation, transferor may still be liable for supplementary obligations. In light of such new provision, investors might want to pay more attention to the legal due diligence exercise and deal structure design.
6. Profit Distribution Timeframe
Article 212 of Company Law 2023 changes the maximum timeframe for profit distribution from one year to six months upon shareholders resolve the same, which reduces uncertainty and is more favorable to shareholders.
7. Capital Reserves for Loss Coverage
Article 214 of Company Law 2023 allows use of capital reserves to offset losses. Since capital reserves reflect the portion of shareholders’ contributions exceeding their proportion in the registered capital, such provision might impact the Company’s net assets and subsequent debt repayment ability, potentially affecting the interests of investors and creditors.
8. Capital Reduction
Article 224 of Company Law 2023 states that a Company shall reduce its registered capital in proportion to the capital contribution held by shareholders, unless it is provided otherwise elsewhere. In the case of repurchase and bet-on, investors might want to take a closer look at the definitive agreements with respect to any non-proportional capital reduction arrangement.
9. Liquidation Process
In terms of Company liquidation, Company Law 2023 specifies that directors are obliged to be responsible for the liquidation process, and the liquidation group shall be composed of directors rather than shareholders, which strengthens the responsibility of directors. Moreover, if a liquidation group is not formed in time or it does not perform duties after its formation, the interested parties (including creditors) may request the people’s court to designate relevant persons to form a liquidation group, which is beneficial to protecting the interests of creditors.
Company Law 2023 sets stricter requirements for shareholders, such as shareholders’ compensation liability to the company in the event of their failure to make capital contribution. In addition, directors, supervisors, and senior management also have severe responsibilities regarding funds of the Company. For example, directors are liable if they fail to verify capital contributions of shareholders, and they are subject to liabilities in case of illegal distribution of profits and illegal reduction of registered capital.
In sum, Company Law 2023 sets higher requirements for shareholders, directors, supervisors, and senior management regarding funds of the Company, and the aforementioned personnel need to be more careful in the course of their performance of duties.
