China’s Company Law: Capital Contribution and Litigation Transitional Rules

published on 9 July 2024 | reading time approx. 3 minutes

On 1 July 2024, China’s revised Company Law came into force. Besides the internal structures, rights and obligations of company-internal organs, a key aspect of the revision concerns the contribution of registered capital.

The initial registered capital, but also a capital increase, must now be paid in within five years. This represents limitations compared to previous, more flexible regulations. Both the company itself and creditors can also demand early payment of the registered capital in the event of outstanding claims. If a founding shareholder in a joint venture does not make its contribution on time or at a reduced value, the other founding shareholders are jointly and severally liable.

Transitional rules for older limited liability companies

On 1 July 2024, the State Council promulgated expected rules how limited liability companies (Co., Ltd.) established before that date may need to adjust their registered capital contributions. In all key aspects, the rules are identical to an earlier draft. Whether or not action is required depends on the individual situation on 1 July 2027:

If the remaining capital contribution period for a Co., Ltd. exceeds five years on 1 July 2027, an adjustment and corresponding amendment to the articles of association is required by 30 June 2027 at the latest

The remaining pay-in period of the capital contribution must not exceed five years, i.e. must not be longer than 30 June 2032.
The outstanding capital contribution must be paid in full within the adjusted period.

No amendments are required if the remaining capital contribution period for a Co., Ltd. Is five years or less on 1 July 2027.

Within 20 working days when the company adjusts the amount, the method, or the period of capital contribution, this must be published in the National Enterprise Credit Information Publicity System (NECIPS).

If the company fails to adjust the capital contribution period and registered capital as set out above, the registration authority must order it to correct this and will set a deadline. If the company still does not comply within the deadline, this will lead to a negative mark in NECIPS and will be announced to the public.

The State Administration for Market Regulation (SAMR) is authorized to formulate additional implementation measures, which might also contain fines in case the company does not comply with the adjustment order. The Company Law itself allows fines to be imposed on the company and its relevant organs in various other cases when the law is breached.

Special obligations of the Board of Directors

It is important to avoid related potential liabilities as a Director. Under the new law, the capital contributions are subject to review by the Board of Directors or by a single Director, if no Board is established. In the event of default, the defaulting shareholder must be reminded in writing at least 60 days in advance. If the capital contribution is not made on time, the company can order the equity to be cancelled by a respective resolution. The defaulting shareholder then loses all rights associated with the unpaid capital contribution. The cancelled equity can either be transferred or the registered capital is reduced accordingly.

The Board of Directors or the single Director is liable for damages caused by a failure to check the capital contributions as described above.

Company related litigation

China’s Supreme People’s Court (SPC) also adopted provisions on 27 June 2024, to clarify the implementation of the new Company Law.

In case civil disputes arise based on facts which have occurred before 1 July 2024, the SPC allows specific Articles of the new Company Law to be applied retroactively “when the application of the Company Law is more conducive to achieving its legislative purpose”. The details are outlined in eight Articles, addressing various civil disputes including: