The subscribed capital contribution system grants shareholders the entitlement to a certain contribution period. However, under what circumstances the entitlement should be revoked, compelling shareholders to contribute capital immediately before the due date, has long been debated in civil and commercial judicial practice. This article explores the revised accelerated capital contribution system under the new Company Law, focusing on the path to adding shareholders with undue capital contributions as judgment debtors in civil enforcement cases.
Regulatory changes
Non-equity Partner
Zhong Lun Law Firm
Article 17 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Change and Addition of Parties in Civil Enforcement states that if a company’s assets are insufficient to settle debts under an effective legal document, shareholders who have not fully paid their capital contributions can be added as judgment debtors, bearing supplementary liability within the unpaid capital contribution scope.
However, controversy exists over whether “shareholders who have not fully paid their capital contributions” include those whose capital contribution deadlines have not yet arrived. According to the capital contribution system, the mainstream view is that only shareholders whose capital contribution deadlines have passed without payment can be directly added in enforcement procedures, and shareholders with undue capital contributions should not be added in principle.
Building on this, article 6 of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference specifies that the creditor can add shareholders with undue capital contributions in enforcement procedures as judgement debtors only in two exceptional cases: (1) the company has grounds for bankruptcy but does not apply for bankruptcy; and (2) the company extends the deadline of shareholders’ capital contribution after the debt arises. In these cases, such shareholders are required to bear supplementary liability within the scope of their unpaid capital contribution.
Compared to the minutes, article 54 of the new Company Law further relaxes the conditions for claiming company debts from shareholders with undue capital contributions. It states: “If the company cannot repay due debts, the company or creditors with due claims have the right to request shareholders with subscribed but undue capital contributions to pay in advance.”
This means that as long as the company cannot repay its due debts an accelerated capital contribution can be requested without the need to examine whether the company has grounds for bankruptcy. Additionally, not only creditors but also the company can request accelerated capital contributions from shareholders whose capital contributions are not yet due.
First case
Paralegal
Zhong Lun Law Firm
On 1 July 2024, the Xicheng District People’s Court in Beijing concluded the first accelerated maturity of capital contribution case under the new Company Law. In this case, an effective legal document determined that a creditor (a former employee of the company) had unpaid wages of more than RMB70,000 (USD9,900).
As the company did not fulfil its debt, the creditor applied for compulsory enforcement of the company’s assets. The Xicheng court found no assets under the company’s name available for enforcement, and terminated the enforcement. Subsequently, the creditor applied to add a shareholder holding 60% of the company’s shares as a judgment debtor. This shareholder had subscribed RMB1.8 million, with a subscribed contribution date of 2052.
The Xicheng court ruled to add the shareholder as a judgment debtor, holding he or she liable for the company’s unpaid debts within his or her unpaid scope of capital contribution. The shareholder filed an objection against enforcement with the Xicheng court, which applied article 54 of the new Company Law, determining the shareholder’s capital contribution obligation to be accelerated, and the creditor had the right to directly request the shareholder to repay under the subrogation rule.
The Xicheng court’s first case clarified that article 54 of the new Company Law on accelerated capital contribution has retroactive effect and can apply to existing enforcement cases before the new Company Law’s implementation. It also outlined the path for directly adding shareholders with undue capital contributions as judgment debtors during the enforcement stage: after obtaining an effective legal judgment, creditors should first apply for enforcement of the company’s assets.
If the company has no assets available for enforcement, or if the assets are insufficient to settle the debt, creditors can apply to the court to add such shareholders as judgment debtors. This accelerates the due date of their capital contributions, making them directly liable for the company’s unpaid debts within the scope of their pending contributions. These accelerated contributions do not have to be added to the company’s assets; instead, they can be used to directly repay creditors.
Shareholder response strategies
In response to creditors’ applications to add additional judgment debtors, shareholders can substantively counter the accelerated maturity request by providing evidence that the company has the ability to repay debts, or that there are other assets available for enforcement that the court has not discovered. Additionally, if shareholders have actually fulfilled their capital contribution obligations, they should promptly request the company to update the capital contribution certificate, shareholder register and new company registration information to avoid being repeatedly added as judgment debtors by other creditors.
The new Company Law’s accelerated capital contribution system for shareholders adjusts the subscribed capital contribution system from a legal perspective, reflecting a tendency to protect creditors’ interests and addressing significant disputes in recent commercial and judicial practice. Besides adding judgment debtors in enforcement procedures, there are no precedents for companies or creditors directly suing for accelerated capital contributions from subscribed shareholders.
Although judges from the Second Civil Division of the Supreme People’s Court expressed a tendency – in the ninth batch of selected Q&A on the court’s Fa Da Wang (Law-Answer Net) platform – to see shareholders’ accelerated capital contribution liability as also based on direct repayment, the practical handling and judgment of such cases, such as whether to directly order shareholders to repay creditors or include the capital contribution to the company’s assets, remains to be observed.
Jiang Xuan is a non-equity partner and Wang Zhongyu is a paralegal at Zhong Lun Law Firm
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E-mail: jiangxuan@zhonglun.com | zhongyuwang@zhonglun.com
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