Earth Research | New Company Law: Both new and old shareholders are responsible for un-paid capital contributions

Authors: Chen Xia, Liang Yu

The effective judgment of the Haidian Court confirmed that Sun is a creditor of Tianhe Company, Renhe Company, and Qian. Qian is the sole shareholder of Renhe Company, and Renhe Company is the sole shareholder of Tianhe Company. Since Renhe Company and Qian failed to provide evidence to prove that their assets were independent of the company's assets, the court ordered Tianhe Company to repay the debt to Sun, and determined that Renhe Company bears joint and several liability for the debt of Tianhe Company, and Qian bears joint and several liability for the debt of Renhe Company. During the execution process, since Tianhe Company, Renhe Company, and Qian had no assets available for execution, the court ruled to terminate the execution proceedings.

Therefore, the plaintiff Sun in this case applied to add the original shareholders of Renhe Company, namely the defendants Zhang, Wang, Li, and Zhao, as the persons subject to execution in the effective judgment. Defendants Zhang and Wang raised defenses, arguing that their capital contribution deadlines had not yet arrived, that the equity was held in trust, and that the transfer of equity was due to their resignation, claiming that they should not be held liable for the debts of Renhe Company. Defendants Li and Zhao did not file a defense, and the third parties Tianhe Company, Renhe Company, and Qian did not make any statements.

In June 2007, Renhe Company was established with a registered capital of 100,000 yuan, contributed by the founding shareholders Cai (actual contribution of 30,000 yuan) and Xu (actual contribution of 70,000 yuan).

In April 2016, Cai and Xu transferred their capital contributions to Zhang and Wang respectively. Zhang and Wang subsequently made a new shareholder resolution to increase the company's registered capital to 5 million yuan, with Zhang subscribing 1.5 million yuan and Wang subscribing 3.5 million yuan, both with a capital contribution deadline of June 2027. Afterward, the company's registered capital was increased again to 30 million yuan, with Zhang subscribing 9 million yuan and Wang subscribing 21 million yuan, the capital contribution deadline remaining June 2027.

In October 2018, Wang transferred his 21 million yuan capital contribution to Qian. In November 2018, the company's articles of association showed that Zhang subscribed 9 million yuan and Qian subscribed 21 million yuan, with the capital contribution deadline still being June 2027.

In June 2019, Zhang transferred his 9 million yuan capital contribution to Li. The company's articles of association that month recorded that Li subscribed 9 million yuan and Qian subscribed 21 million yuan, with the capital contribution deadline unchanged. In July 2019, Li transferred his 9 million yuan capital contribution to Zhao, and the company's articles of association stated that Zhao subscribed 9 million yuan and Qian subscribed 21 million yuan, with the capital contribution deadline still being June 2027. In August 2019, Zhao transferred his 9 million yuan capital contribution to Qian, making Qian the sole shareholder of Renhe Company. On the same day, Qian made a shareholder decision to amend the company's articles of association, changing the subscribed capital contribution deadline to July 2019.

The main point of contention in this case is whether the original shareholders of Renhe Company, Zhao, Li, Zhang, and Wang, should be added as persons subject to execution for the debts of Renhe Company according to relevant regulations, given that the capital contribution deadline had not yet arrived when they transferred their equity. According to Article 4, Paragraph 1, Item (1) of the Supreme People's Court's "Several Provisions on the Application of the Time Effect of the Company Law of the People's Republic of China," in civil dispute cases arising from legal facts before the implementation of the Company Law, if the law or judicial interpretation at that time did not provide for this, but the Company Law did, the provisions of the Company Law should be applied: (1) In the case where a shareholder transfers equity with an outstanding capital contribution and the transferee fails to pay the capital contribution on time and in full, the determination of the capital contribution liability of the transferor and transferee shall be governed by the provisions of Article 88, Paragraph 1 of the Company Law.

According to Article 17 of the Supreme People's Court's "Several Provisions on Issues Concerning the Change and Addition of Parties in Civil Enforcement," when a for-profit legal person is the person subject to execution and its assets are insufficient to repay the debts determined by the effective legal document, if the applicant for execution applies to change or add shareholders or contributors who have not paid or have not paid in full their capital contributions, or initiators who bear joint and several liability for such capital contributions according to the Company Law, and bear liability within the scope of unpaid capital contributions, the people's court shall support it.

The facts of this case occurred during the period of implementation of the revised "Company Law of the People's Republic of China" (hereinafter referred to as the 2018 Company Law), however, the 2018 Company Law did not stipulate the capital contribution liability of shareholders when transferring equity before the capital contribution deadline. In contrast, Article 88, Paragraph 1 of the revised "Company Law of the People's Republic of China" (hereinafter referred to as the 2023 Company Law) clearly stipulates this issue, and this clause reflects the legislative purpose of fully protecting the rights and interests of company creditors while taking into account the interests of shareholders' capital contribution deadlines.

Furthermore, the provisions on the obligation of shareholders to pay their subscribed capital contributions on time and in full in Article 28 of the 2018 Company Law and Article 49 of the 2023 Company Law are consistent. Based on the basic principle of legal application that "new laws prevail over old laws," Article 49, Paragraph 1 of the 2023 Company Law should be applied. Therefore, Article 49 of the 2023 Company Law has retroactive effect on this case.

Article 49, Paragraph 1 of the 2023 Company Law stipulates that shareholders shall pay their subscribed capital contributions on time and in full in accordance with the requirements of the company's articles of association. In addition, according to Article 88, Paragraph 1, if a shareholder transfers an unpaid and outstanding capital contribution share, the transferee shall bear the obligation to pay such capital contribution; if the transferee fails to pay on time and in full, the transferor shall bear supplementary liability for the unpaid portion. Therefore, company shareholders are the primary responsible parties for maintaining the adequacy of the company's capital and must fulfill the obligation to pay their subscribed capital contributions on time and in full.

Qian, the current and only shareholder of Renhe Company, had his investment deadline expire in July 2019. However, he failed to appear in court to provide positive evidence proving that he completed the investment on time. Therefore, there is currently no evidence to show that Qian paid the investment in full and on time. Qian's equity was acquired from Zhao (RMB 9 million) and Wang (RMB 21 million). After acquiring the equity, Qian amended the company's articles of association, bringing forward the investment deadline to July 2019. Therefore, both the equity transferor and transferee should bear corresponding legal responsibilities based on this deadline. According to relevant laws and regulations, even if Zhao and Wang's investment deadlines had not yet expired at the time of the equity transfer, if Qian failed to pay the investment in full and on time, Zhao and Wang, as transferors, should still bear supplementary responsibility for the portion of Qian's unpaid investment within the amount of capital they transferred respectively.

Since Zhao's equity was acquired through successive transfers from Cai, Zhang, and Li, and Wang's equity was acquired from Xu, and Cai and Xu had respectively paid RMB 30,000 and RMB 70,000 in registered capital when Renhe Company was established, Qian's unpaid capital is RMB 29.9 million. Among this, Zhao should bear supplementary responsibility within the RMB 8.97 million of Qian's unpaid investment, while Wang should bear supplementary responsibility within the RMB 20.93 million of Qian's unpaid investment.

Regarding whether Li and Zhang, the previous shareholders from whom Zhao acquired his equity, need to bear corresponding supplementary responsibility, supplementary responsibility refers to the situation where, when the responsible party's own property is insufficient to bear its civil liability, other related responsible parties need to supplement the insufficient portion. In cases of multiple equity transfers, supplementary responsibility should be borne sequentially. First, the ultimate transferee bears the capital contribution responsibility; if the ultimate transferee's property is insufficient to make up for the unpaid capital, then the previous transferors should sequentially bear supplementary responsibility for the insufficient portion. Therefore, in this case, since Zhao's equity was acquired from Li, and Li's equity was acquired from Zhang, if Zhao's property is insufficient to make up for Qian's unpaid capital, Li should bear secondary supplementary responsibility for the insufficient portion; if Li's property is also insufficient to make up for Zhao's unpaid capital, then Zhang should bear further supplementary responsibility for the insufficient portion.

Therefore, according to Article 17 of the "Supreme People's Court's Provisions on Several Issues Concerning the Change and Addition of Parties in Civil Enforcement," given that Renhe Company's property is insufficient to repay the debts determined by the effective judgment, Sun has the right to apply to add Zhang, Wang, Li, and Zhao as parties, bearing legal responsibility for Renhe Company's unpaid debts in the aforementioned manner. As for Zhang and Wang's defenses that their investment deadlines had not yet expired, that the equity was held on behalf of others, and that the equity transfer was due to resignation, these are insufficient to exempt them from their obligation to contribute capital as registered shareholders of Renhe Company, nor can they exempt them from their legal responsibility to the company's creditors when the company's property is insufficient to repay due debts. The court does not accept Zhang and Wang's defenses.

After trial, the Haidian Court ruled to add defendants Zhang, Wang, Li, and Zhao as the obligors of the effective judgment, bearing supplementary responsibility to plaintiff Sun for the unpaid debts of the third party, Renhe Company, confirmed by the judgment. Among them, defendant Zhao bears supplementary responsibility within the RMB 8.97 million of the third party Qian's unpaid investment; defendant Wang bears supplementary responsibility within the RMB 20.93 million of the third party Qian's unpaid investment. If defendant Zhao's property is insufficient to repay the debt, Li will bear supplementary responsibility for the insufficient portion; if Li's property is also insufficient to repay the debt, Zhang will bear supplementary responsibility for the insufficient portion.

After the announcement of the judgment, the parties did not clearly indicate whether they would appeal.

(All names in the text are pseudonyms)

Source: Haidian District People's Court, Beijing; Supreme People's Court Practical Cases