The updated version of the Company Law of the People’s Republic of China was officially approved on 29 December 2023, introducing important changes in the field of company law. The new provisions – analysed in our previous newsletter – will enter into force on 1 July 2024.
In view of the forthcoming entry into force of the new version of the Company Law, the spotlight focuses on a number of possible measures to support companies operating in the Chinese market.
Company Law 2023: What’s next?
On December 29, 2023, the Standing Committee of the 14th National People’s Congress concluded its seventh session, during which China officially adopted some amendments to the current Company Law. The latest amendments will come into effect on 1 July 2024, with the main objective of filling a number of gaps in corporate governance and preventing financial risks.
One of the main provisions contained in the 2023 revision to the Company Law concerns the share capital, which shall be fully paid within five years from the company establishment date.
Capital contribution timeline
The new Company Law not only affects companies incorporated after the date of entry into force of the law, but also seems to have significant implications for existing companies. In fact, with specific reference to the capital contribution, the new Company Law provides that:
- The registered capital of the companies established after 1 July 2024 shall be fully paid within five years from the newco establishment date.
- For existing companies (established before 1 July 2024), in general, the capital contribution timeline should be gradually adapted to the new regulatory provisions in order to comply with the five-year requirement. However, the new Company Law establishes a three-year transition period for existing companies (from 1 July 2024 to 30 June 2027). In the case of contribution periods – previously agreed by the shareholders – exceeding five years, the existing companies shall, during the three-year transition period, adjust their contribution period to the five years required by the new law (therefore, a maximum period of 3 + 5 years is permitted). This implies that the payment of the share capital shall be completed by 30 June 2032.
Capital reduction
As a result of the reduction in the period permitted by law for the capital contribution, the amount of the registered capital could represent an excessive financial burden for the investor (as, for example, in the case of companies with excessively high registered capital).
In these cases, the reduction of capital would allow the amount owed by shareholders within the time limit set by law to be reduced.
Capital reduction would also have positive effects in the case of insolvent companies. In fact, in such circumstances, creditors would be entitled to exercise their right to require the shareholder concerned (who has not, therefore, paid his share of the capital) to provide for the advance payment of the capital against the debt owed by the company. Therefore, it follows that the capital reduction would make it possible to limit the shareholders’ financial risk vis-à-vis possible creditors.
The capital reduction procedure shall of course be carried out in compliance with current legislation, which requires:
- The planning of the capital reduction by the Board of Directors, including specific information on the initial capital amount, the amount of capital to be reduced, the method of capital reduction, the shareholders involved, etc.;
- The shareholder’s meeting resolution on the capital reduction and further requirements relating to amendment of the Articles of Association;
- The draft of the balance sheets and inventories of property of the company in order to inform shareholders and creditors of the solvency of the company and its current financial and asset status;
- Notification to creditors and communication through public announcement, with consequent balance of the debt or issuance of guarantees requested by the creditors;
- Conclusion of the agreement of capital reduction with the shareholders in order to clarify the modalities of capital reduction;
- The change to the Articles of Association;
- The notification to tax authority.
It is understood that in the case of acts attributable to an “illegal” reduction of capital (i.e. where certain statutory obligations are not fulfilled), creditors may exercise their right to demand that shareholders assume the liabilities arising from the failure to settle the debt to the extent of the amount of the reduced capital.
On the contrary, in the event that the shareholders complete the capital reduction procedure in full compliance with applicable law, if the creditors do not promptly request the settlement of the debt or the issuing of adequate guarantees, the latter would no longer be entitled to exercise the aforementioned right.
The 2023 revision to the Company Law marks a milestone in Chinese corporate law, strengthening the rights and responsibilities of shareholders and internal management bodies, on the one hand, and promoting greater transparency and accountability in corporate operations, on the other hand.
China Desk – Zunarelli Law Firm
