Defending creditors’ rights under new Company Law | China

Economic development in recent years has been severely hindered by the pandemic, international tensions and market fluctuations, resulting in a surge in companies’ outstanding debt and a hike in litigation against them. On 1 July 2024, the amended Company Law came into effect, strongly emphasising the protection of creditors’ interests by expanding their avenues for recourse. This article provides a brief analysis of approaches available to creditors for realising their claims under the new Company Law.

Claims against shareholders

Accelerating payment of capital contributions. The new Company Law allows creditors to claim against shareholders for advanced payment of the capital contributions subscribed if companies are unable to discharge debts when they become due. Notably, the law does not specify the exact form of shareholders’ satisfaction of such liability, leaving it unclear whether shareholders are to contribute funds to companies’ registered capital or directly settle specific debts. This ambiguity may lead to disputes in practice.

Claims against original shareholders under the shared liability obligation following equity transfers. If a shareholder acquires equity through transfer, both the transferee and the original transferor may be held liable for the outstanding capital contributions, while the transferor is to bear the supplementary liability.

Claims against promoters. Company promoters are held jointly and severally liable for the outstanding capital contributions of other promoters. If a promoter proves unable to fulfil its financial obligations, creditors shall have the right to name other promoters as co-defendants, holding them jointly and severally liable.

Claims against shareholders illegally withdrawing registered capital. Capital withdrawn illegally by shareholders shall be returned, while the responsible directors, supervisors and senior officers (DSOs) are held jointly and severally liable for any losses incurred by the company. In this respect, once a shareholder is found by creditors to have illegally withdrawn the registered capital, creditors may hold the shareholder and responsible DSOs liable for recovery to the extent of the principal and interest of the withdrawn amount.

Claims against shareholders for indemnification for illegal capital reduction. In case of illegal reduction of registered capital, shareholders are obliged to return the capital received or restore their capital contributions. Responsible DSOs are held liable for any damages caused. Illegal capital reduction is ineffective against creditors. Thus, creditors may hold the shareholders and responsible DSOs liable for compensation to the extent of the illegal capital reduction.

Claims against shareholders based on the profit distribution system. In case of illegal profit distributions to shareholders, shareholders are obliged to return such distributions to the company. Both the shareholders and responsible DSOs are held liable for compensation.

Claims against shareholders after illegal cancellation of company. In case of company deregistration via the summary procedure, shareholders who are found to have made false commitments are held jointly and severally liable for the debts incurred prior to the deregistration. Creditors may hold shareholders liable for compensation if any errors are identified in the company cancellation process.

Disregard of corporate personality

Under the new Company Law, the concept of disregard of corporate personality is expanded to enhance protection of creditors’ rights and interests.

Forward disregard of corporate personality. In alignment with the pre-amendment Company Law, it is stipulated that creditors may request the court to disregard the corporate personality of the company and recover against shareholders, if shareholders abuse the independent corporate personality and limited liability of the company to evade debts and harm the interests of creditors.

Horizontal disregard of corporate personality. The new Company Law has, for the first time, entrenched the horizontal disregard of corporate personality through legislation that focuses on “corporate personality confusion” and “excessive domination and control”. When shareholders use multiple companies under their control to collude maliciously and evade debts, creditors may hold the controlling shareholders or the actual controllers liable for company debt.

One-person company. In the case of a one-person company, the burden of proof is reversed. If shareholders fail to prove separation of their personal assets from the company assets, creditors may hold the shareholders jointly and severally liable for the company’s debts.

Claims against DSOs

The new Company Law also introduces additional obligations for DSOs, holding them liable under multiple circumstances, such as directors’ failure to urge capital contributions, as well as DSOs being responsible for shareholders’ illegal capital withdrawal, illegal capital reduction, unlawful dividends or liquidation.

New regulations are also imposed on shadow directors and de facto directors, their duties of loyalty and diligence being emphasised throughout the legislation. These changes have reinforced the responsibilities of DSOs, with more options provided to creditors for interest protection.

The new Company Law has integrated past judicial practices and international experiences to enhance creditor protection in such areas as shareholders’ obligation of capital contribution, DSOs’ responsibilities, liquidation duties and disregard of corporate personality. New avenues are thus made available for creditors to safeguard their interests. Companies are advised to assess their risks and ensure compliance in accordance with the new Company Law.

Ethan Zhang is a senior partner at Joint-Win Partners. He can be contacted by phone at +86 13661698075 and by email at [email protected]
Nea Liang is an attorney at law at Joint-Win Partners. She can be contacted by phone at +86 18117111357 and by email at [email protected]