Directors’ call for capital independent | China

The Simante case, a retrial dispute involving Hu, five other directors and Simante Shenzhen over corporate interest damages, has set a pivotal precedent on directors’ obligations and liabilities to fulfil duties to call for capital.

Following a protest by the Supreme People’s Procuratorate (SPP), the Supreme People’s Court (SPC) overturned the original ruling in January 2025. The final judgment held three first-term board directors (including Hu) jointly liable for 10% of the company’s losses due to their failure to fulfil capital call duties. The three second-term directors were exempted from liability.

The Simante case’s reversal underscores the significance of the SPP’s protest while reflecting evolving judicial standards on directors’ capital call obligations and liabilities.

During Simante Shenzhen’s bankruptcy liquidation, administrators sued six directors seeking joint liability for USD5 million in unpaid shareholder capital contributions. The courts of first instance and second instance both dismissed the claim, ruling directors’ passive failure to exercise their duty of care in calling capital contributions bore “no necessary connection to shareholder’s default in payment and no direct causation to the company losses”. In a dramatic June 2019 reversal, the SPC’s first retrial held all six directors – including Hu – jointly liable for the full USD5 million shortfall.

Call duties v payments

Under the previous Company Law framework, directors’ duty to demand shareholder contributions stemmed from their broader fiduciary duty of diligence. Article 13.4 of the Judicial Interpretations of the Company Law (III) further clarifies that if shareholders fail to fulfil or fully fulfil their capital contribution obligations during a capital increase, directors and senior executives neglecting their duty of care will face liability.

In the Simante case, regarding the nature of this duty and corresponding liability, the SPP argued in its protest:

“Directors’ duty to demand capital contributions is different in nature from shareholders’ obligation to pay. The liability directors face for failing to fulfil this duty should correspond to the nature of their obligation – it cannot be equated with shareholders’ liability for breaching payment obligations, nor can shareholder liability be transferred to directors. The nature and scope of these obligations must not be confused.

“Although directors have a duty of diligence to demand capital contributions, their passive inaction has limited influence on the harm caused by the capital shortfall. Therefore, joint liability should not apply. A director’s failure to demand contributions constitutes a breach of their duty of care – a tort liability – and they should only bear compensation proportionate to their degree of fault.” The retrial judgment reveals that the SPC adopted the SPP’s position, ruling directors liable only within the scope of their demonstrated negligence for failing to demand capital contributions. This establishes the independent nature of directors’ capital call obligations and liabilities – distinct from shareholders’ underlying payment duties.

In a significant refinement, the SPC precisely identified “accountable directors” and their respective liability limits. This aligns with the evolving judicial trend towards nuanced adjudication of corporate officers’ responsibilities, ensuring penalties correspond to proven fault.

Directors’ joint liability

Where directors negligently fail to fulfil their duty to demand capital contributions, they face liability proportionate to their fault. However, should directors actively assist shareholders in evading payment obligations or participate in capital withdrawal, they may be deemed joint tortfeasors and held jointly liable. This distinction is codified in article 14 of the Judicial Interpretations of the Company Law (III), which establishes that directors, supervisors, senior executives and actual controllers who facilitate shareholders’ capital withdrawal become jointly liable for both principal and interest on the withdrawn capital.

In the Simante case, all six directors served dual roles – as board members of both the Chinese subsidiary (Simante Shenzhen) and its Cayman Islands-based sole shareholder (Simante Cayman), while also holding executive positions within the actual controller. This unusual ownership structure, their dual directorships, and the controlling shareholder’s business decisions probably influenced the SPC’s decision to hold all six jointly liable during the first retrial.

The ruling underscores how directors occupying simultaneous positions within both subsidiary and parent companies face particularly complex compliance obligations and liabilities. Such overlapping roles demand heightened due diligence and more robust risk mitigation strategies to navigate inherent conflicts of interest.

The exemption of the second-term directors from liability raises an important question: Does a controlling shareholder’s decision to withhold further capital contributions automatically absolve directors of their capital call obligations? This crucial issue warrants close examination.

Regrettably, while the Simante case has reached its conclusion, the full judgment remains unpublished. The court’s precise reasoning and the decision’s broader implications for judicial practice continue to await clarification through the eventual release of court documents and subsequent cases.

New law

Though adjudicated under the previous Company Law framework, the Simante case’s final judgment remarkably aligns with new provisions on capital call obligations introduced in the revised legislation. Article 51 of the new Company Law explicitly mandates:

“After a limited liability company is established, the board of directors shall verify the capital contributions of shareholders. If it finds that any shareholder has not made capital contributions on schedule and in full amount as provided for in the articles of association, the company shall send a written notice of call to the shareholder to call up capital contributions. Where any loss is caused to the company due to failure to fulfil the obligations as prescribed in the preceding paragraph in a timely manner, the responsible director shall make compensation.”

The updated legislation provides more precise guidance on directors’ duty to demand capital contributions. Liability for compensation arises only when a company suffers actual losses due to breaches of this specific duty, not from failures in shareholders’ underlying payment obligations. The scope of accountability is also carefully delineated, applying only to “responsible directors” rather than imposing blanket liability across entire boards. It is important to recognise that fulfilling this obligation may extend beyond simply issuing demand letters. Depending on circumstances, directors may need to take additional reasonable measures to address shareholders’ capital deficiencies. Directors should attempt, within the scope of their duties, to negotiate capital reduction/extensions, initiate legal proceedings, or commence share forfeiture proceedings to fulfil the duty of care ordinarily expected of company officers for the company’s best interests.

Jiang Xuan is a partner and He Lingyu is a paralegal at Zhong Lun Law Firm