Update on Shareholder Liability in Regard of Subscribed Capital in a China Company

We should have written this post earlier.

On this blog, in old posts, we mentioned the shareholder liability in regard of their subscribed capital contribution:

Can company’s creditors go after shareholders who have not paid up subscribed capital?

Registered capital, the greater, the better? Not really!

The main point is that a creditor of a company may go after the company’s shareholders who have subscribed to the company’s registered capital but have not paid it up to the extent of the amount of such unpaid capital.

The rule was initially provided in an interpretation by China Supreme Court of China Company Law back in 2010. Over the years, courts have found it unfair to shareholders who are said to enjoy the time benefits of deferring the payment of the subscribed capital, esp when the company may still have other assets available to repay its debts.

To balance the two opposing claims, China Supreme Court has issued new guidelines in applying this rule in judicial practice. Here is what it says:

在注册资本认缴制下,股东依法享有期限利益。债权人以公司不能清偿到期债务为由,请求未届出资期限的股东在未出资范围内对公司不能清偿的债务承担补充赔偿责任的,人民法院不予支持。但是,下列情形除外:

Under corporate capital subscription regime, shareholders have the time benefits therein. Where a company creditor requests shareholders to assume complementary compensation liabilities for the debts the company is unable to pay, to the extent of unpaid subscribed capital that has not come due, the people’s courts shall not support such requests, except as otherwise provided below:

(1)公司作为被执行人的案件,人民法院穷尽执行措施无财产可供执行,已具备破产原因,但不申请破产的;  

 where the company is subject to an enforcement proceeding and the court has exhausted all enforcement measures and found not assets available therefor, and the company is de facto bankrupt and doesn’t apply for bankruptcy.

(2)在公司债务产生后,公司股东(大)会决议或以其他方式延长股东出资期限的。 

where, in the wake of the creation of the debts, the shareholders meeting resolve or otherwise decide to extend the term of capital contribution to company

So, the new guidelines have narrowed the application of the rules regarding corporate shareholder liabilities for debts incurred by the company they invest, making it more difficult for creditors to go after corporate shareholders.

In other hand, this equally means that it is riskier to deal with limited liability company in China that is often undercapitalized and used for defrauding creditors, in particular, foreign creditors.

Jason Tian

Jason Tian, senior partner, specializes in foreign-related legal services ranging from foreign investment in China, banking and capital, real estate, M&A, corporate, international trade, estate planning, inheritance and divorce at his blog: https://www.sinoblawg.com.

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