Q&A for Foreign Invested Companies under the Amended Company Law
张晓宇 谌红莹
As of July 1st, 2024, the Amended Company Law of the People’s Republic of China has come into effect, and foreign invested companies in China may face series of new challenges. Xeon Lawyers hereby highlights 10 key questions to help foreign invested companies better understand the Amended Company Law and achieve sustainable development in Chinese market.
This article does not constitute our formal legal opinion. Should you have any specific enquiries, feel free to contact our team by email: xeoninfo@163.com . Our team will reply to you ASAP.
Q1、Under the Amended Company Law, when shall the registered capital be fully paid?
Under the Amended Company Law, the registered capital of any newly established limited liability companies incorporated later than July 1, 2024, shall be fully paid within five years, and the registered capital of any newly established Stock Limited Companies incorporated later than July 1, 2024, shall be fully paid before the company is established.
For companies established prior to July 1, 2024, according to the Regulations on the Implementation of the Registered Capital Registration System of the Company Law of the People’s Republic of China , any existing limited liability companies shall adjust the capital contribution period into five years during a Three-year Transition Period by June 30, 2027, and the subscribed registered capital shall be fully paid by June 30, 2032; while the registered capital of any existing Stock Limited Companies shall be fully paid within the Three-year Transition Period by June 30, 2027.
Q2、What options are available for foreign invested companies that have not yet fully paid the registered capital?
There are five options:
● Fully paying the capital contribution prior to the deadline stated in Q1;
● Reducing the registered capital of the company;
● Transferring equity of the company;
● Repurchasing equity of the company; and
● Dissolving the company.
Q3、How to reduce the capital?
Capital can be reduced by three procedures:
● General Procedure;
● Summary Procedure；and
● Special Procedure.
Q4、Which procedure provides the quickest way to reduce the capital?
For any existing companies established prior to July 1st, 2024, Special Procedure provides the quickest way to reduce the capital. Companies may announce to the public through the National Enterprise Credit Information Publicity System for 20 days. Where the creditors do not raise an objection during the announcement period, the company may complete reduction of registered capital.
However, Special Procedure is only available when the following conditions are satisfied, otherwise, General Procedure or Summary Procedure shall be applied which may take longer time.
● there is no unsettled debt or the debt is evidently less than the company’s paid-up registered capital;
● all shareholders undertake to bear joint and several liability for the company’s debts incurred prior to capital reduction within the scope of the original subscribed capital contribution; and
● all the directors undertake not to harm the company’s debt repayment capacity and ability to continue as a going concern.
Q5、Shall founding shareholders of a limited liability company be jointly and severally liable for capital contribution?
Yes, if any founding shareholder fails to pay the capital, the other founding shareholders will be jointly and severally liable for the insufficient capital contribution.
Q6、If Shareholder A has transferred its equity to Shareholder B and Shareholder B has transferred its equity to Shareholder C, who will be liable for the capital contribution?
Shareholder C shall be liable, but if Shareholder C fails to pay, Shareholder B and Shareholder A shall bear supplementary liability for the insufficient capital contribution.
Q7、What will be the legal consequence for shareholders of a limited liability company failing to pay the capital contributions?
If any shareholder fails to pay the capital contributions on time, the company shall issue a written notice granting a grace period of no less than 60 days. If the shareholder still fails to pay within the grace period, that shareholder will immediately lose their shareholder rights proportionally.
Q8、If a company has no ability to pay its debts, can creditors require shareholders of the company to pay the unpaid capital contributions in advance even if the contribution is not due?
Yes. The Amended Company Law protects interests of creditors. Even if the unpaid registered capital contribution is not due, creditors can require shareholders of the company to pay their unpaid capital contributions in advance if the company itself has no ability to pay its due debts.
Q9、If a shareholder owns Company A, Company B and Company C, will Company B and Company C be jointly and severally liable for the debts of Company A?
Generally, companies are independent and will not be liable for debts of each other even if they are controlled by the same shareholder. However, if creditors can prove that Company A is evading its debts by using the relationship between these independent but related companies through means such as inter-company transactions or improper asset transfers, Company B and Company C will be jointly and severally liable for the debts of Company A.
Q10、What are shareholders’ rights for information?
The Amended Company Law protects shareholders’ rights for information. Shareholders are entitled to review and copy financial statements and any other documents of the company as well as its wholly owned subsidiaries if shareholders require. Furthermore, shareholders may authorize law firms, accounting firms or any other independent institutions to review and copy the materials above if shareholders would like to.
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