With the latest amendments to China’s Company Law set to be enforced from 1 July, shareholders, directors, supervisors and senior executives have a strict obligation to fulfill their duties in line with the law, as failure to do so can lead to serious consequences.

Shareholder Contributions 

Under Article 47 of the Company law, the capital contributions subscribed for by all shareholders should be fully paid within five years of formation of the company in accordance with the company’s bylaw. 

Article 266 further stipulates that: “This Law takes effect on July 1, 2024. 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.”

Within three years after the implementation of the new Company Law, existing limited liability companies must adjust their remaining contribution period to within five years, according to “Opinions of the Beijing Municipal Market Supervision Administration on Comprehensive Implementation of Pilot Registration for Promoting High-Quality Development of Market Entities (Exposure Draft).” All shareholders of existing joint stock limited companies should fully subscribe to their shares within three years after the new Company Law takes effect.

Shareholder and Promoter Liability 

At the time of formation of a limited liability company, if a shareholder fails to pay the capital contribution according to the company’s bylaw, or the value of the non-monetary property as capital contribution is apparently lower than the capital contribution subscribed for, the other shareholders at the time of formation will be jointly and severally liable to the extent of the shortfall in the shareholder’s capital contribution. 

If a promoter fails to make payment of the shares subscribed for by him, or the actual value of the non-monetary property as capital contribution is apparently lower than the shares subscribed, the promoter and other promoters will be jointly and severally liable to the extent of the shortfall in the capital contribution. 

If a shareholder transfers his equities with respect to the capital contribution subscribed for before expiration of the period of payment of capital contribution, the transferee has an obligation to pay the capital contribution; if the transferee fails to pay the capital contribution in full on schedule, the transferor will bear supplementary liability for the capital contribution the transferee fails to pay on schedule. If a shareholder transfers his equities without paying capital contributions on the date as specified by the company’s bylaw, or with the actual value of the non-monetary property as capital contribution being apparently lower than the capital contribution subscribed for, the transferor and the transferee shall be jointly and severally liable to the extent of the shortfall in the capital contributions. If the transferee neither knows nor should know the foregoing circumstance, the transferor shall be liable. 

Key Personnel’s Liabilities 

Neither the controlling shareholder, nor the actual controller, nor any of the directors, supervisors or senior management of the company may injure the interests of the company by taking advantage of its connection relationship. Anyone who causes any loss to the company due to violating the preceding paragraph shall be liable for the compensation. 

After formation of a limited liability company, its board of directors must check the capital contributions of its shareholders, and the company has to issue a written demand for payment to a shareholder, demanding payment of capital contribution, if it discovers that the shareholder has not made full payment of capital contributions on schedule according to the company’s bylaw. If the board of directors fails to promptly perform its obligations specified in the preceding paragraph and causes losses to the company, any liable director shall be liable for compensation. 

After the formation of a company, no shareholder may illegally take away the registered capital. If the provisions of the preceding paragraph are violated, the shareholder has to return the registered capital illegally taken away; if losses are caused to the company, any liable director, supervisor, or officer will be jointly and severally liable for compensation with the shareholder. 

Where directors and senior executives cause damage to others by performing their duties, or are intent or grossly negligent, they will also be liable for compensation. 

Where the controlling shareholder or actual controller of a company instructs a director or officer to engage in an act against the interests of the company or shareholders, the controlling shareholder or actual controller will be jointly and severally liable with the director or officer. 

If a company distributes profit to shareholders in violation of the Company Law, the shareholders must return to the company the profit distributed; and shareholders and each liable director, supervisor, and officer are liable for compensation for losses caused to the company, if any. 

If registered capital is reduced in violation of the Company Law, shareholders have to return the funds they received, and if shareholders are granted exemption from or a reduction in capital contributions, the original state shall be restored; and shareholders and each liable director, supervisor, and officer will be liable for compensation for losses caused to the company, if any. 

In a nutshell, the amended Company Law lays out clearer and tougher expectations for shareholders, directors, and senior executives when it comes to their financial commitments and duties. They need to stay sharp and fully comply with the law to steer clear of avoidable financial setbacks.

Yan Mingcheng, Partner, Zhong Lun Law Firm LLP