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On December 29, 2023, the Seventh Session of the Standing Committee of the 14th National People's Congress voted to adopt the newly revised *Company Law of the People's Republic of China*, which shall come into force as of July 1, 2024.

(This article only interprets the relevant provisions concerning limited liability companies)

I. Specific Provisions of the New Company Law of China on the Five-year Time Limit for Capital Contribution Subscription

Article 47: The registered capital of a limited liability company shall be the total amount of capital contributions subscribed to by all shareholders registered with the company registration authority. The total capital contributions subscribed to by all shareholders shall be fully paid up by the shareholders within five years from the date of the company's establishment in accordance with the provisions of the articles of association of the company.

Where laws, administrative regulations and decisions of the State Council provide otherwise on the paid-in registered capital, minimum registered capital limit and time limit for shareholders' capital contributions of limited liability companies, such provisions shall prevail.

Meanwhile, the new Company Law of the People's Republic of China provides that: For companies registered and established prior to the entry into force of this Law, where their capital contribution terms exceed the time limit prescribed herein, unless otherwise provided by laws, administrative regulations or the State Council, such terms shall be gradually adjusted to fall within the time limit specified in this Law; where the capital contribution terms or the amount of capital contributions are obviously abnormal, the company registration authority may, in accordance with the law, require the relevant company to make timely adjustments. Specific implementation measures shall be formulated by the State Council.

II. Prompt Response of the State Administration for Market Regulation of the People's Republic of China

On December 30, 2023, the State Administration for Market Regulation, in its article titled *Improving the Capital Subscription Registration System to Foster an Honest and Orderly Business Environment*, takes the effective date of the new Company Law of China, namely July 1, 2024 as the dividing point, and explicitly stipulates that except for companies otherwise provided for by laws, administrative regulations or decisions of the State Council, the following arrangements shall apply to existing companies and newly incorporated companies:

(1) Existing companies: A sufficiently long transition period of a specified number of years shall be set, and the time limit for making capital contributions shall be adjusted to fall within the time limit prescribed in the new *Company Law of the People's Republic of China* on a category-by-category basis, in a phased, steady and orderly manner. (The entities mainly affected are existing companies whose time limit for paying subscribed capital exceeds July 1, 2029.)

For existing companies with manifestly abnormal time limits for capital contribution and amounts of capital contribution, the company registration authorities may require them to make timely adjustments in accordance with the law. The definition of "manifestly abnormal" shall be scientifically specified on the basis of objective analysis of company registration data and actual work practices. Only a very small number of companies that explicitly violate the principle of authenticity and run counter to objective common sense will be affected. As for the specific implementation, it shall be subject to the specific implementation measures to be formulated by the State Council.

(2) Newly incorporated companies: The capital contributions subscribed by all shareholders shall be fully paid up by the shareholders within five years from the date of the company's incorporation in accordance with the provisions of the company's articles of association.

III. By what means may shareholders fulfill their obligation to pay in full their capital contributions as stipulated in the new Company Law of China?

The current Company Law of China stipulates that shareholders may make capital contributions in forms including currency, in kind, intellectual property rights and land use rights. On this basis, the new Company Law adds provisions permitting equity interests and creditors' rights to be used as capital contributions.

It shall be noted that capital contributions made with non-monetary properties shall satisfy the following conditions: (1) Such properties can be valued in monetary terms; (2) Such properties can be transferred in accordance with law; (3) Such properties shall not violate the exclusionary provisions of laws and administrative regulations.

IV. What legal consequences may arise for shareholders that fail to fully pay their paid-in capital contributions as scheduled under the new *Company Law of China*?

(I) [Call by the Board of Directors]

The board of directors shall verify the capital contributions of shareholders. Where a shareholder is found to have failed to pay in full the capital contribution stipulated in the articles of association of the company as scheduled, the board of directors shall issue a written capital contribution call notice to such shareholder to urge the payment of the capital contribution. Where the board of directors fails to perform its obligations of verification and capital contribution urging in a timely manner, thus causing losses to the company, the liable directors shall bear liability for compensation. (Article 51 of the Revised Company Law of China)

For a company without a board of directors, the director shall exercise the functions and powers of the board of directors as prescribed by this Law.

(II) [Where a shareholder still fails to make capital contributions after a call for such contributions, the said shareholder shall be disqualified, and the shares with forfeited rights shall be transferred or cancelled.]

Where a company (via its board of directors) issues a written demand for capital contribution to a shareholder who fails to make full capital contributions on schedule, a grace period of no less than 60 days may be specified in the aforesaid demand. Upon expiry of the grace period, if the shareholder still fails to make the required capital contributions, the company may, upon a resolution adopted by its board of directors, issue a written notice of equity forfeiture to the aforesaid shareholder. As of the date of issuance of the notice, the shareholder shall lose the equity interests corresponding to the unpaid capital contributions.

The corresponding equity interest forfeited by such shareholder shall be transferred in accordance with the law, or the company shall reduce its registered capital accordingly and cancel such equity interest. Where the aforesaid transfer or cancellation is not completed within six months, other shareholders of the company shall pay the corresponding capital contributions in full in proportion to their respective capital contribution ratios. (Article 52 of the new *Company Law of the People's Republic of China*)

(III) [Such shareholder shall also be liable for compensation for the losses caused to the company]

Where a shareholder fails to pay the full amount of capital contributions within the prescribed time limit, it shall, in addition to making full payment of the capital contributions to the company, be liable for compensation for the losses caused to the company. (Article 49 of the new *Company Law of the People's Republic of China*)

(IV) [Where the relevant shareholder makes insufficient capital contribution at the time of the company's incorporation, other shareholders at the time of such incorporation shall bear joint and several liability.]

When a company is incorporated, where a shareholder fails to actually pay its capital contribution in accordance with the provisions of the company's articles of association, or the actual value of the non-monetary property contributed as capital is significantly lower than the amount of capital contribution it has subscribed for, other shareholders at the time of incorporation shall bear joint and several liability with the aforesaid shareholder within the scope of the insufficient capital contribution. (Article 50 of the newly revised *Company Law of China*)

(V) [Where the failure of the relevant shareholder to pay the full amount of capital contributions within the prescribed time limit is caused by withdrawal of capital contributions, the responsible directors, supervisors and senior management personnel shall be jointly and severally liable with such shareholder for the losses caused to the company.]

After the incorporation of a company, no shareholder may withdraw its capital contributions. Where a shareholder violates the aforesaid provision, it shall return the withdrawn capital contributions; if losses are caused to the company thereby, the liable directors, supervisors and senior managerial personnel shall bear joint and several compensation liability together with such shareholder. (Article 53 of the new *Company Law of the People's Republic of China*)

(VI) [Administrative Liability: Order to Make Corrections and Imposition of Fines by the Company Registration Authority]

Where promoters or shareholders of a company fail to deliver, or fail to deliver within the prescribed time limit, the monetary or non-monetary properties contributed as capital, the company registration authority shall order them to make rectification, and may impose a fine of not less than RMB 50,000 and not more than RMB 200,000. If the circumstances are serious, a fine of not less than 5% and not more than 15% of the amount of the unpaid capital contributions shall be imposed thereon, and the person directly in charge and other directly liable persons shall be fined not less than RMB 10,000 and not more than RMB 100,000. (Article 252 of the new *Company Law of the People's Republic of China*)

V. How Should Existing Companies and Shareholders Who Have Not Yet Fully Paid Up Their Subscribed Capital Contributions Respond?

(I) Reduction of Company Capital

Where the registered capital of a company exceeds the amount required for its actual operation, particularly where it is unreasonably inflated, and the shareholders' paid-in capital contributions are not yet due, the company may consider carrying out capital reduction in accordance with the law. In case of capital reduction by a company, pro rata capital reduction shall be adopted (i.e., the amount of capital contributions shall be reduced correspondingly in light of the shareholders' respective capital contribution proportions), unless otherwise provided by law or otherwise agreed by all shareholders.

【Capital Reduction Shall Comply with the Statutory Capital Reduction Procedures】

Compared with the currently effective *Company Law of the People's Republic of China*, the new *Company Law of the People's Republic of China* involves no substantial changes in capital reduction procedures, except for the newly added provisions requiring public announcement through the National Enterprise Credit Information Publicity System. Pursuant to the provisions of the new *Company Law*, the capital reduction procedures are specified as follows:

1. The Board of Directors shall formulate the capital reduction plan;

2. A shareholders' meeting resolution approving the company's reduction of registered capital, which is adopted by shareholders representing two-thirds or more of the voting rights, may be passed concurrently with a shareholders' meeting resolution on amending the company's articles of association.

3. Prepare the balance sheet and the inventory of property.

4. Creditors shall be notified within 10 days from the date on which the resolution of the shareholders' meeting is adopted.

Key Points: Creditors shall be notified directly via such means as EMS, electronic mail, etc. Public announcement shall not be used to replace direct notification.

5. An announcement shall be published in newspapers or on the National Enterprise Credit Information Publicity System within 30 days from the date when the resolution of the shareholders' meeting is adopted;

Creditors who have received the notice shall, within 30 days from the date of receipt of the notice, and creditors who have not received the notice shall, within 45 days from the date of the public announcement, have the right to require the company to discharge its debts or provide appropriate security.

6. Handle the alteration registration for capital reduction.

【Illegal Capital Reduction Entails Severe Legal Consequences】

Civil Liability: Where a company reduces its registered capital in violation of the provisions of this Law, shareholders shall refund the funds they have received; where the capital contributions of shareholders are reduced or exempted, the original status shall be restored. Where losses are caused to the company as a result, the shareholders and the responsible directors, supervisors and senior managerial personnel shall be liable for compensation. (Article 226 of the newly revised *Company Law of the People's Republic of China*)

Administrative Liability: Where a company fails to notify or make a public announcement to its creditors in accordance with the provisions of this Law when reducing its registered capital, the company registration authority shall order it to make corrections and impose a fine of not less than RMB 10,000 but not more than RMB 100,000 on the company. (Article 255 of the new *Company Law of the People's Republic of China*)

(II) Company Deregistration

1. The newly revised Company Law of China adds the following provision: Simplified Deregistration

The newly revised Company Law of China has added provisions on simplified deregistration of companies. For shell companies, or companies that intend to cease business operations, have not yet made full paid-in capital contributions but bear no debt liabilities, they may consider canceling their company registration through the simplified deregistration procedure.

Simplified Deregistration Procedure

(1) All shareholders hereby undertake that during the existence of the Company, the Company has not incurred any debts, or has discharged all its debts in full.

Note: Where a shareholder makes a false commitment, such shareholder shall bear joint and several liability for the debts existing prior to the cancellation of registration.

(2) The public notice shall be published on the National Enterprise Credit Information Publicity System, and the public notice period shall be no less than 20 days;

(3) Upon expiration of the public notice period, where no objection is filed, the company may apply for cancellation of registration within 20 days.

2. General Deregistration

For companies that are not eligible for deregistration under the simplified deregistration procedure, the company may be voluntarily dissolved, liquidated and deregistered by convening a shareholders' meeting. A brief comparison of the corresponding procedures under the current Company Law of the People's Republic of China and the newly revised Company Law of the People's Republic of China is presented as follows:

【First, Voluntary Dissolution】

the current Company Law of China

the Newly Revised Company Law of China

Where a company convenes a shareholders' meeting, a shareholders' meeting resolution on the dissolution of the company shall be adopted by shareholders representing two-thirds or more of the voting rights. (Dissolution by a shareholders' meeting resolution is a statutory cause for the dissolution of a company.)

The company shall publicize the grounds for dissolution through the National Enterprise Credit Information Publicity System within 10 days.

【Secondly, liquidation in accordance with the law】

Where a company is dissolved pursuant to a resolution of its shareholders' meeting, it shall conduct liquidation. The revisions stipulated in the newly revised Company Law of China have strengthened the liquidation obligations and liabilities of directors.

the current Company Law of China

the Newly Revised Company Law of China

A liquidation group shall be formed within 15 days from the date of occurrence of the cause for dissolution to commence liquidation.

Directors are the liquidation obligors of the company, and shall form a liquidation group to conduct liquidation within 15 days as of the date when the grounds for dissolution arise.

The liquidation group of a limited liability company shall be composed of its shareholders.

The liquidation team shall be composed of directors, except where otherwise provided for in the articles of association or other persons are elected pursuant to a resolution of the shareholders' meeting.

Where a liquidation obligor fails to perform its liquidation obligations in a timely manner, thereby causing losses to the company or its creditors, it shall bear liability for compensation.

The liquidation group shall, within 10 days from the date of its establishment, notify the creditors, and make a public announcement in newspapers within 60 days. Creditors shall file their claims with the liquidation group within 30 days from the date of receipt of the notification, or within 45 days from the date of the public announcement if they fail to receive the notification.

The liquidation group shall notify creditors within 10 days from the date of its establishment, and make a public announcement in newspapers or on the National Enterprise Credit Information Publicity System within 60 days. Creditors shall file their claims with the liquidation group within 30 days from the date of receiving the notification, or within 45 days from the date of the public announcement if they have not received such notification.

Members of the liquidation team shall faithfully perform their duties and fulfill their liquidation obligations in accordance with the law.

Members of the liquidation team shall not take advantage of their functions and powers to accept bribes or other illegal income, nor misappropriate the property of the company.

Where a member of the liquidation team causes losses to the company or its creditors due to intention or gross negligence, he shall bear the liability for compensation.

Members of the liquidation group shall, in the performance of their liquidation duties, be bound by the duty of loyalty and the duty of diligence.

Where members of a liquidation group neglect to perform their liquidation duties and cause losses to the company, they shall bear the liability for compensation.

Whoever causes losses to a creditor due to intent or gross negligence shall bear the liability for compensation.

Finally, deregister the company

the current Company Law of China

the Newly Revised Company Law of China

Upon the completion of a company's liquidation, the liquidation group shall prepare a liquidation report, submit the same to the shareholders' meeting or the people's court for confirmation, and thereafter submit the report to the company registration authority, file an application for the cancellation of the company's registration, and make a public announcement on the termination of the company.

Upon completion of company liquidation, the liquidation group shall prepare a liquidation report, submit it to the shareholders' meeting or the people's court for confirmation, and thereafter file the same with the company registration authority to apply for cancellation of the company's registration.

On December 21, 2023, the State Administration for Market Regulation, the General Administration of Customs and the State Taxation Administration jointly announced the *Guidelines for Enterprise Deregistration (2023 Revision)*. Companies may handle deregistration formalities with reference to the aforesaid Guidelines.

(III) Shareholders may consider making capital contributions in non-monetary properties.

Where the registered capital of the company remains unchanged, shareholders may, in light of the actual operational needs of the company, consider making capital contributions through a combination of monetary and non-monetary properties. However, where a shareholder makes capital contribution with non-monetary property, such property shall be free from any right defects or encumbrances, and shall be appraised and valued at the fair market value, with no overvaluation or undervaluation allowed. In the meantime, where change registration formalities are required, the shareholder shall promptly complete the transfer registration of the aforesaid non-monetary property under the name of the company.

(IV) Shareholders shall exercise prudence in the transfer of equity interests

A shareholder may still be held liable even after transferring his or her equity interests. As stipulated in Paragraph 1 of Article 88 of the newly revised *Company Law of the People's Republic of China*, where a shareholder transfers equity interests corresponding to the capital contributions he has subscribed for while the time limit for paying such capital contributions has not yet expired, the transferee shall bear the obligation to pay the aforesaid capital contributions. Where the transferee fails to pay the capital contributions in full on schedule, the transferor shall bear supplementary liability for the portion of capital contributions that the transferee fails to pay as scheduled.

Therefore, the transferor shareholder shall strictly and prudently select the transferee shareholder, and strictly supervise the transferee shareholder to faithfully perform its capital contribution obligations after acquiring the equity, so as to prevent itself from being held liable for reasons attributable to the transferee shareholder.

6. Conclusion

There is no doubt that the provision on the maximum five-year capital contribution subscription period under the new *Company Law of China* has exerted a considerable impact on a large number of existing companies and their shareholders against the current backdrop of economic downturn. All relevant parties shall, on the premise of fully understanding the relevant provisions of the *Company Law*, take active responses in a timely manner in light of the actual conditions of the companies and their own circumstances.