Creditor Rights vs. Shareholder Obligations: The Ongoing Debate in Chinese Corporate Law

At China Legal Solutions, we often encounter complex legal questions arising from China’s evolving corporate landscape. One particularly contentious issue is whether creditors can pursue corporate shareholders who haven’t fully paid their subscribed capital. This question has gained significant importance following China’s 2013 company registered capital reforms.

The Current Landscape

Since the 2013 reforms, many new companies have been established with substantial registered capital to be paid over extended periods – sometimes up to 100 years. This has created a scenario where companies can operate with minimal actual capital input from shareholders.

The Legal Divide

Chinese courts are split on this issue, primarily due to different interpretations of Article 13 of the Supreme Court’s third interpretation of China Company Law. Let’s break down the two main perspectives:

1. The Conservative View

Some judges argue that creditors can only pursue shareholders for unpaid capital that has become due according to the company’s articles of association (AOA). They base this on the phrase “accrued interests” in the law and Article 28 of the Company Law, which states shareholders should pay capital “on schedule.”

2. The Progressive View (Our Stance)

We, along with many other legal professionals, believe creditors should be able to pursue shareholders for unpaid capital regardless of the AOA’s schedule. Here’s why:

• a) The Supreme Court’s Evolving Stance: A 2016 interpretation concerning civil enforcement proceedings suggests a shift towards allowing creditors to pursue unpaid capital without regard to the AOA schedule.
• b) AOA Schedules Shouldn’t Bind Creditors: While the AOA is a private agreement among shareholders, it significantly impacts third-party creditors. Courts should have the authority to adjust these private agreements when justice demands it.
• c) Original Reform Intent: The 2013 reforms aimed to spur investment, not to provide shareholders with a means to evade creditor liability.

Additional Considerations

1. Balancing Act

Courts must balance encouraging investment with protecting creditor rights. Allowing shareholders to indefinitely postpone capital contributions could lead to widespread abuse.

2. Due Diligence Implications

This debate highlights the importance of thorough due diligence for anyone doing business in China. Understanding a company’s capital structure and contribution schedule is crucial.

3. Potential Future Reforms

Given the ongoing debate, we may see further legislative or judicial clarification in the coming years. Stay tuned for updates from China Legal Solutions.

4. International Comparison

This issue isn’t unique to China. Many jurisdictions struggle with balancing limited liability principles against creditor protection. China’s approach will be closely watched by international business communities.

Practical Advice

For Creditors

If you’re a creditor dealing with a company whose shareholders haven’t fully paid their capital, consider the following:

• Review the company’s AOA and capital contribution schedule.
• Investigate the company’s actual assets and operations.
• Consider pursuing legal action against shareholders, even if their contribution isn’t technically due.
• Consult with legal experts familiar with the latest judicial interpretations and local court tendencies.

For Shareholders

If you’re a shareholder in a Chinese company:

• Be aware that long-term capital contribution schedules may not protect you from creditor claims.
• Consider accelerating your capital contributions if the company faces financial difficulties.
• Ensure the company maintains clear records of all capital contributions and business operations.

Conclusion

At China Legal Solutions, we’re committed to helping our clients navigate these complex issues. Whether you’re a creditor seeking to protect your interests or a shareholder looking to understand your obligations, our team of experts is here to provide tailored advice based on the latest legal developments and our deep understanding of Chinese corporate law.

Final Note: While the legal landscape remains uncertain, proactive legal strategy is key. Don’t hesitate to reach out to us for personalized guidance on your specific situation.