In the previous article about China’s new Company Law, which has taken effect on 1 July 2024, we introduced how the new amendments will simplify the corporate governance structure. In this article we will focus on the new rules regarding capital contribution.
In this series of articles, we will introduce some important changes regarding China’s new Company Law, to better facilitate our clients with their business compliance in China. This article will focus on the simplification of the corporate governance structure under the new Law.
Background
Since the enactment of China’s Company Law in 1993, the registered capital system has gone through a process from very strict paid-in capital rules to more relaxed rules. In the 2013 Company Law revision, the more lenient provisions were introduced for the company’s registered capital regime: no more time limit on shareholders’ capital contribution payment as well as no more minimum amount of registered capital.
Chinese lawmakers have identified a few issues in connection with the more lenient rules. The registered capital may no longer accurately reflect a company’s creditworthiness and solvency, which increased the cost of creditworthiness assessment for transactions. In addition, without the time limits on the payment of capital contribution, it became easier for shareholders to evade the responsibility to pay-in the capital. Against this background, the new Company Law will restrict the payment term of the capital contribution.
Term of Contribution Payment
Article 47(1) of the new Company Law adjusts the period for shareholder contributions to a Limited Liability Company (“有限责任公司“, hereinafter “LLC”) to a maximum of five years.
Article 47 (English translations of Chinese laws are from pkulaw.com)
The registered capital of a limited liability company shall be the amount of capital contributions subscribed for by all its shareholders as registered with the company registration authority. The capital contributions subscribed for by all shareholders shall be fully paid within five years of formation of the company in accordance with the company’s by law. […]
For LLCs incorporated before July 1, 2024, Article 266 of the new Law provides a transitional period which will be implemented to help companies accommodate this new change. During this transitional period, to comply with the new provisions, companies established before the new Law takes effect are required to gradually adjust the capital contribution period in their Articles of Association (AoA) (as further explained below). Those companies may also choose to fully pay up their registered capital within the period, or to reduce their registered capital to an “affordable” amount so that it can be paid up in full before the mandatory deadline.
Article 266
[…] If a company has been registered and formed before this Law takes effect, and the capital contribution period exceeds the period specified by this Law, the company shall, unless otherwise provided by laws, administrative regulations, or the State Council, gradually make adjustments to ensure that the capital contribution period is not longer than the period specified in this Law.
If the capital contribution period or capital contribution is abnormal, the company registration authority may require timely adjustment. The State Council shall develop the specific measures.
Amongst legal professionals here is discussion whether the abovementioned provisions conflict with the prohibition on retroactivity of laws prescribed in Article 104 of the Legislation Law of China. Some legal writers are of the opinion that the transitional period aims to protect the rights and benefits of legal persons, therefore satisfying the exception to the rule that laws should not have retroactive effect. To clarify and guide the transition, the State Council published the Provisions on the Implementation of the Management System for the Registration of Registered Capital under the Company Law of the People’s Republic of China (in Chinese “关于实施《中华人民共和国公司法》注册资本登记管理制度的规定”), where the transitional period is set forth to be 3 years (from July 1, 2024 to June 30, 2027), as provided for in Article 2 of the Provisions. Worth noting, the transitional period is the period within which a company is required to adjust its AoA and disclose it to the public.
Article 2
Companies established and registered before June 30, 2024, with remaining unpaid subscribed capital contributions for limited liability companies having a subscription period exceeding five years from July 1, 2027, shall adjust the remaining subscription period to within five years before June 30, 2027, and record it in the company’s articles of association. Shareholders shall pay their subscribed capital contributions in full within the adjusted subscription period. The initiators of joint stock companies shall pay the full amount of their subscribed shares before June 30, 2027.
If the production and operation of the company involve national interests or significant public interests, and the relevant competent department of the State Council or the provincial people’s government proposes an opinion, the State Administration for Market Regulation may agree to allow the company to contribute capital according to the original subscription period.
| LLCs Incorporated Date | Capital Contribution Payment Deadline |
| After 1 July 2024 | Maximum 5 years after incorporation |
| Before 1 July 2024 | Since 1 July 2027, remaining contribution period < 5 years: no adjustment needed. Since 1 July 2027, remaining contribution period > 5 years: |
For a Joint-Stock Limited Company (“股份有限公司“）established by promotion, the capital contribution rules will also be changed from a subscription system to a paid-in system. Article 98 of the new Law provides that the promoter “shall make full payment of the shares subscribed for by him before the formation of the company”. Consequently, according to Article 2 of the Provisions, a Joint-Stock Limited Company incorporated before July 1, 2024 will have to pay the full amount of the subscribed shares no later than June 30, 2027.
Supporting Measures
To ensure the fulfilment of the obligation of shareholders to make capital contributions, the new Company Law also introduces new measures: i) Equities and claims being the new forms of contribution (Article 48); ii) Statutory obligation for directors to verify shareholders’ contributions (Article 51); iii) The disqualification system for shareholders who have made inaccurate contributions (Article 52); iv) Acceleration of shareholders’ contributions deadline when the company is unable to pay its due debts (Article 54); v) The accountability mechanism for the transfer of shares not yet due for contribution, and of defective shares (where the contribution period has expired but the shares have not been paid up in full (Article 88)), etc..
More information
If you want to learn more about the changes in China’s new Company Law, please check out the next article in this series. If you have questions about setting up and operating a company in China, please feel free to contact us:
- Job Bezemer 裴耀博先生 (jbz@kneppelhout.nl)
- Victor Zheng 郑琳先生 (vz@kneppelhout.nl)
- Peiying Li 李佩英女士 (pl@kneppelhout.nl)
This article is drafted with the help of Miss Xinyu Wang (intern of China Practice).
