Earth Research | The Application of Article 88 of the Company Law and the Pursuit of Historical Shareholder Liability

Authors: Chen Xia, Liang Yu

Recently, the latest statements from the Legislative Affairs Commission, the Sichuan Higher People's Court, and the Supreme People's Court regarding the retroactive effect of Article 88 of the Company Law have drawn widespread attention from the legal community. In particular, on December 24, 2024, the Supreme People's Court issued a reply regarding the retroactive effect of this article, marking a clearer definition of the scope of application of Article 88 of the new Company Law. So, should historical shareholders bear responsibility for company debts? This article will examine the amendment process of Article 88 of the Company Law, the current legal provisions on the liability of historical shareholders, and the current disputes and judicial practices, providing a reference for future case handling.

Amendment Process and Background of Article 88

1

Since the revision of the Company Law in 2013, the paid-in capital system has been changed to the subscribed capital system. This reform has greatly facilitated equity transfer, but it has also brought new problems: many shareholders transferred their equity without paying their capital contributions on time. To solve this problem, on December 29, 2023, the Standing Committee of the Fourteenth National People's Congress made a second amendment to the Company Law. This amendment added clauses on shareholder transfers related to the subscription deadline, with Article 88 attracting particular attention.

Article 88 of the Company Law, implemented on July 1, 2024, clearly stipulates: "If a shareholder transfers equity that has been subscribed but has not yet reached the capital contribution deadline, the transferee shall bear the obligation to pay the capital contribution; if the transferee fails to pay the capital contribution in full and on time, the transferor shall bear supplementary responsibility for the transferee's failure to pay on time." The implementation of this clause aims to resolve the issue of responsibility attribution arising from equity transfers when shareholders fail to pay their capital contributions on time.

Scope of Application of Article 88 and Disputes over the Liability of Historical Shareholders

2

With the implementation of Article 88, an important issue has arisen in practice: should historical shareholders bear supplementary responsibility for the capital contribution liability arising from equity transfers? This issue has become a focal point in company debt litigation.

On December 24, 2024, the Supreme People's Court issued a reply on Article 88 of the Company Law, clearly stating that this clause only applies to equity transfer transactions that occurred after July 1, 2024. For disputes over capital contribution liability arising from equity transfers before July 1, 2024, where shareholders had not yet reached the capital contribution deadline, courts should handle them according to the original Company Law and relevant legal provisions. This reply promptly addressed social concerns and clarified the boundaries of the application of the old and new laws.

However, it should be noted that for historical shareholders, liability can only be exempted if the equity transfer was normal. If a shareholder maliciously transfers equity to deliberately evade responsibility, they will still be held accountable according to the relevant provisions of the original Company Law.

Legal Provisions and Specific Regulations on the Liability of Historical Shareholders

3

According to Article 19 of the Supreme People's Court's "Provisions on Several Issues Concerning the Change and Addition of Parties in Civil Enforcement," when the company's assets are insufficient to repay the debts determined by an effective judgment, if a historical shareholder has not fulfilled their capital contribution obligation and has transferred their equity, the people's court may support the creditor's application to add the historical shareholder to bear the responsibility. This provision shows that even if the company is unable to repay its debts, historical shareholders may still be held liable for failing to fulfill their capital contribution obligations.

Different Views and Judicial Practices

4

In judicial practice, there are mainly three views on whether historical shareholders should bear responsibility for equity transfers before the capital contribution deadline:

1. Historical shareholders should bear responsibility: This view holds that when shareholders transfer equity without fulfilling their capital contribution obligations, especially when shareholders fail to fulfill their capital contribution responsibilities as stipulated, and the company's debts cannot be repaid, historical shareholders should bear supplementary responsibility. In practice, there are many cases of evading responsibility through equity transfers. According to the theory of debt transfer, the responsibility of the debtor should be jointly borne by the transferor and the transferee.

2. Historical shareholders should not bear responsibility: This view argues that since historical shareholders have already transferred their equity and no longer have a direct connection with the company's business, they should no longer be responsible for the company's debts. This position is supported by the Legislative Affairs Commission and the Sichuan Higher People's Court, who believe that Article 88 of the new Company Law is not retroactive and therefore should not be applied to equity transfer transactions before July 1, 2024.

3. Comprehensive consideration of malicious transfer behavior: This view argues that the court should comprehensively judge whether there was malicious transfer behavior by the historical shareholder. If a shareholder transfers equity to evade capital contribution responsibility while knowing that the company is unable to fulfill its debts, then they should continue to be held accountable. This view advocates that the court should judge the legality and reasonableness of the shareholder's behavior based on the specific circumstances.

Practical Paths for Holding Historical Shareholders Accountable

5

Regarding how to hold historical shareholders accountable, there are two main paths in the current legal system:

1. Adding historical shareholders to bear responsibility in the enforcement procedure: When the company's assets are insufficient to repay its debts, creditors can apply for an objection to execution and request the court to add historical shareholders to bear responsibility. However, this procedure is time-consuming, and there is a high risk of rejection during the filing review process.

2. Filing a lawsuit for damaging the interests of company creditors: Creditors can also separately file a lawsuit, claiming that the shareholder's actions have damaged the legitimate interests of the company's creditors and demanding that they bear responsibility. Compared with objections to execution, filing a separate lawsuit may be more direct and effective.

Conclusion

6

The implementation of Article 88 of the Company Law has had a significant impact on the pursuit of company debt liability, but it has also caused some controversies in practical application. In particular, the issue of whether historical shareholders should bear responsibility, the judicial standards of courts in different cases have not yet been fully unified. The Supreme Court's latest reply provides a clear solution to this problem: the new law applies to equity transfer transactions that occurred after July 1, 2024, while whether historical shareholders bear responsibility needs to be fairly handled according to the original Company Law and relevant legal provisions.

In judicial practice, courts will comprehensively consider whether shareholders maliciously transferred equity to ensure that the legitimate interests of creditors are not harmed. For creditors, understanding and using the correct legal path will help them better protect their rights and interests.

Lawyer Profile

Chen Xia

Chen Xia

Heilongjiang Dadi Law Firm

Director

Attorney Chen Xia, with a Bachelor of Law from Nankai University and a Master of Law from Heilongjiang University, is the director of Heilongjiang Dadi Law Firm. With 32 years of practice experience, she possesses extensive professional experience and profound legal expertise. Her practice areas cover finance, securities, private equity financing, corporate mergers and acquisitions, construction and real estate, PPP projects, state-owned enterprise reform, and transportation engineering, among other fields.

Currently, she serves as a member of the Construction and Real Estate Business Committee of the All China Lawyers Association; a member of the Heilongjiang Provincial Committee of the Chinese People's Political Consultative Conference; a member of the Heilongjiang Provincial Committee of the China National Democratic Construction Association; director of the Social and Legal Committee of the Heilongjiang Provincial Committee of the China National Democratic Construction Association; an arbitrator for the Harbin Arbitration Commission; an arbitrator for the Korean Commercial Arbitration Board; an arbitrator for the Belt and Road Wuhan Arbitration Commission; a member of the Administrative Reconsideration Expert Committee of the Heilongjiang Provincial People's Government; a member of the Administrative Reconsideration Expert Committee of the Harbin Municipal People's Government; recognized as one of "China's Top 60 Construction Lawyers" by ENR Magazine and Construction Times of the United States; and an arbitrator for the Wuhan Arbitration Commission.

梁羽

Liang Yu

Heilongjiang Dadi Law Firm

Lawyer

Liang Yu, a lawyer at Heilongjiang Dadi Law Firm, graduated from the Law School of Heilongjiang University. She possesses a profound legal background, is proficient in legal research, document drafting, and material organization, and has a strong sense of responsibility with rich practical experience. Her areas of expertise include contract disputes, administrative disputes, civil and commercial disputes, and corporate legal advisory services. She has participated in contract reviews, case file organization, and arbitration award drafting multiple times, and provided legal opinions to government agencies, state-owned enterprises, and public institutions. Additionally, she has been involved in drafting due diligence reports, researching complex legal issues, and organizing case evidence. She is committed to providing high-quality legal consulting services to clients.

Past Reviews

Dadi Honors | Dadi Wins China Business Law Journal Awards 2024 (Regional Award)

Dadi Honors | Lawyers Liu Jun and Zhao Jingyu from Dadi Law Firm Selected for Heilongjiang Province Foreign-Related Lawyers Talent Pool

Dadi Honors | Dadi Partner Lawyer Zhao Jingyu Awarded "LexisNexis 2024 Annual Bankruptcy Field Brand Star: Power Lawyer" Title

Dadi Honors | Projects Undertaken by Dadi Law Firm Listed on LegalOne 2023 China Outstanding Deals and Cases List

Dadi Achievements | Our Firm Appointed as Legal Counsel for Heilongjiang Province Postal Industry Safety Center

Dadi Achievements | Our Firm Appointed as Standing Legal Counsel for Multiple Subsidiaries of Greenland Group Northeast Division

Dadi Achievements | Our Firm Successfully Shortlisted for Heilongjiang Agricultural Investment Group Lawyer Pool Project

Dadi Achievements | Our Firm Appointed as Standing Legal Counsel for China Life Property & Casualty Insurance Company Limited Harbin Central Branch

Dadi Achievements | Our Firm Re-appointed as Standing Legal Counsel for Harbin Jiuzhou Group Co., Ltd.

Dadi Achievements | Our Firm Re-appointed as Standing Legal Counsel for Harbin Jiuzhou Group Co., Ltd.

Dadi Achievements | Our Firm Appointed as Legal Counsel for Beidahuang Grain Group Co., Ltd.