Challenges in reducing subscribed registered capital

The new Company Law has enhanced the system of registered capital subscription and registration, stipulating that limited liability companies must fully pay up their registered capital within five years from their establishment, while joint-stock limited companies must fully pay up their capital upon establishment.

Additionally, the law authorises the State Council to set separate regulations on the actual payment of registered capital, the minimum amount of registered capital, and the contribution period for limited liability companies, including adjustments to the registered capital of companies established and registered before the implementation of the new Company Law whose contribution period exceeds the period specified in the new law.

The 2013 amendment to the Company Law replaced the system of actual capital payment with a subscription system, easing market entry restrictions and improving the efficiency of shareholder capital utilisation. However, with the implementation of the subscription system, issues such as blind subscriptions, exorbitant subscriptions and overly long contribution periods have emerged. The new Company Law, while retaining the subscription registration system, strengthens the institutional constraints on shareholder contribution periods, which is beneficial for ensuring transaction security and protecting creditor interests.

Upon enforcement of the new Company Law, existing companies with shareholder contribution periods exceeding five years will face challenges in either actual capital payment or adjustment. This article will analyse the difficulties that existing companies registered before the implementation of the new Company Law may encounter in reducing subscribed registered capital.

Liabilities for unpaid capital

To strengthen institutional constraints on shareholder contribution periods, the new Company Law sets out the following legal liabilities for unpaid registered capital.

(1) Article 49 of the new Company Law stipulates the responsibility for inadequate or unrealised contributions, explicitly stating that shareholders failing to pay the full amount of their contributions on time shall be liable for compensating losses incurred by the company.

(2) Article 50 of the new Company Law provides that other shareholders at the time of the establishment of a limited liability company and shareholders with inadequate contributions shall bear joint liability within the scope of the shortfall.

(3) Article 51 of the new Company Law establishes the responsibility of the board of directors to urge the fulfilment of contribution obligations and also sets out the liability of directors for failing to exercise the obligation to urge contribution, resulting in losses to the company.

(4) Article 52 of the new Company Law introduces the mechanism of forfeiting rights for shareholders failing to fulfil their contribution obligations despite reminders from the company, potentially resulting in the forfeiture of their equity rights.

(5) Article 54 of the new Company Law introduces an accelerated contribution deadline for shareholders. If the company is unable to repay maturing debts, it or the creditors with matured claims have the right to demand shareholders who have subscribed but not yet reached their contribution deadlines make early payments. The threshold for the application of this is lower compared to the Minutes of the National Courts’ Civil and Commercial Trial Work Conference.

(6) Article 88 of the new Company Law explicitly states the responsibilities after transferring equities with defective contributions in limited liability companies. In case of transferring equities before the deadline for contributions, the transferee shall bear the obligation to contribute, and the transferor shall be responsible for supplementing any contributions not made on time. If a shareholder transfers equity where contributions are not paid as scheduled, or non-monetary contributions are not fulfilled, both the transferor and transferee bear joint liability for the shortfall. If the transferee is unaware or should not have been aware of the above-mentioned circumstances, the transferor shall bear the responsibility.

(7) Article 252 of the new Company Law stipulates legal liabilities for initiators and shareholders who fail to fulfil contribution obligations or provide false contributions. Registration authorities may impose fines ranging from RMB50,000 (USD6,950) to RMB200,000 for failure to correct and, in severe cases, fines ranging from 5% to 15% of the falsely contributed or unpaid amounts. Responsible executives and other directly liable personnel may face fines ranging from RMB10,000 to RMB100,000.

Procedures for capital reduction

Article 224(3) of the new Company Law introduces the principle of proportional capital reduction. However, this requirement does not apply if otherwise specified by law, agreed upon by all shareholders of a limited liability company, or stipulated in the articles of association of a joint-stock limited company.

The new Company Law allows companies to reduce their registered capital to offset losses when using capital reserves is insufficient. In such cases, companies are not required to notify creditors within 10 days from the date of the resolution to reduce registered capital made by the shareholders’ meeting, nor are they obliged to repay debts or provide corresponding guarantees within the period specified in article 224(2) of the new Company Law.

Finally, article 226 of the new Company Law explicitly outlines the legal liabilities of shareholders, directors, supervisors and senior management personnel after illegal capital reduction. According to this provision, illegal capital reduction is not legally effective, and shareholders remain liable to the company up to the originally subscribed capital. Shareholders, directors, supervisors and senior management personnel who cause losses to the company shall bear liability for compensation.

Legal capital reduction

To avoid the risks of unpaid subscribed capital, shareholders of existing companies should consider legal capital reduction.

(1) Companies should reasonably and legally determine the amount of registered capital and subscription periods based on their business conditions and scale.

(2) Considering that creditors have the right to demand repayment or corresponding guarantees when a company reduces its capital, companies with outstanding debts should carefully implement capital reduction to avoid triggering legal liabilities that would further complicate debt issues.

(3) The State Administration for Market Regulation issued the Regulations of the State Council on the Implementation of the Registration Administration System for the Registered Capital of the People’s Republic of China (Draft for Comments) on 6 February 2024, clarifying the transitional rules for existing companies and the application rules for contribution periods of newly established companies. It reserves space for existing companies to respond. It is advisable for companies to engage professional advisers early on to develop comprehensive capital reduction plans.

Zhao Xun is a partner and Guo Kaihang is an associate at Grandway Law Offices