[Q&A] Registered Capital Payment: Complying with the New Company Law
2024. 1. 25
[Q&A] Registered Capital Payment: Complying with the New Company Law
As a corporate law firm, we are used to answering many questions from our clients about their business in China. In this series of Q&A articles, we will discuss some of the topics that our clients have shown interest in.
Question: How should existing companies respond to the requirement in the new Company Law of full payment of registered capital, for limited liability companies, within 5 years?
Answer: On December 29, 2023, the newly revised Company Law of the People's Republic of China (hereinafter referred to as the "new Company Law") was passed in the Seventh Session of the Fourteenth National People's Congress Standing Committee and will officially come into effect on July 1, 2024.
Article 266 of the new law stipulates: "For companies established and registered before the implementation of this law that have a capital contribution period exceeding the prescribed period, except for provisions in laws, administrative regulations, or by the State Council, they shall gradually adjust to within the prescribed period of this law. For companies with extremely unreasonably high registered capital or contribution period, the company registration authority may request timely adjustments according to the law. Specific implementation measures will be determined by the State Council." This provision distinguishes companies into three categories: (1) limited liability companies registered after July 1, 2024, which will implement the five-year period for capital contributions; (2) companies with extremely unreasonably high registered capital or contribution period; (3) existing companies with capital contribution periods exceeding five years before the implementation of the new law.
For existing companies with capital contribution periods exceeding five years before the implementation of the new law, the new Company Law uses the phrase "should gradually adjust." This indicates that the new regulations adopt a "gradual transition" approach, providing a grace period for these existing companies to rectify their capital contribution periods. However, even with this transitional period, these companies will still need to adjust the capital contribution periods of their shareholders to "full payment within five years from the establishment of the limited liability company," as stipulated in the new Company Law. The specific operational guidelines during the transitional period will depend on the implementation rules issued by relevant market supervision and management authorities. Based on our analysis of current laws and regulations and practical experience, we suggest the following main approaches:
Given the diversity of situations of the existing companies, they need to make adjustments based on their actual situations according to the capital contribution period requirements of the new Company Law. Therefore, they will inevitably face two situations: (1) companies with shareholders capable of actual payment gradually completing their capital contributions; (2) companies with shareholders lacking the capability for actual payment may need to reduce capital or deregister the company. Regarding companies whose capital contribution period expires before June 30, 2024, no further adjustments to the capital contribution period are required. They simply need to make timely payment of the subscribed capital in full. This article will not elaborate on this aspect. For the two types of companies mentioned above, we recommend the following approaches:
(1) Existing companies with shareholders capable of actual payment
1. Amend the company's Articles of Association to adjust the capital contribution period to five years from the establishment of the company (if there are alternative provisions in subsequent State Council implementation measures, adjust it to a longer time period after the expiration of five years).
2. Shareholders complete their actual capital contributions within the new prescribed period specified in the amended Articles of Association.
3. Additionally, based on Article 40 of the new Company Law, companies should disclose shareholder actual capital contributions through the National Enterprise Credit Information Publicity System.
(2) Existing companies with shareholders lacking the capability for actual payment
Under the previous stipulation that companies are only subject to the registered capital and there is no mandatory requirement for paid-up capital, many companies exhibited exaggerated registered capital, unreasonable registered capital, and excessively long capital contribution periods. Among them, there is a significant proportion of companies with high registered capital, but lacking the capability for actual payment. For such companies, it may be advisable to consider reducing capital or deregistering the company before the implementation of the new Company Law.
Capital Reduction
The immediate financial burden imposed on shareholders by actual capital contributions can be relatively significant. For shareholders, who are temporarily unable to fulfill their capital contribution obligations, existing companies may consider reducing their registered capital through the statutory capital reduction procedure.
According to the policy "Improving the Registered Capital Registration System to Create a Credible and Orderly Business Environment" issued by the State Administration for Market Regulation, it is explicitly stated that "when specific implementation measures are formulated by the State Council, relevant parties should conduct in-depth research and analysis on the potential problems and difficulties that business entities may encounter. They should issue targeted policy measures to streamline and optimize the procedures for capital reduction and documentation, guide existing companies in amending their Articles of Association to reasonably adjust the capital contribution period and amounts to ensure the above work is carried out in a steady manner."
Regarding the adjustment of the "capital contribution amount" mentioned here, the existing companies can undergo a "capital reduction" procedure in accordance with the Company Law. As the revised Company Law will only come into effect on July 1, 2024, existing limited liability company shareholders can still follow the current Company Law's capital reduction procedure and adjust their subscribed capital according to their actual circumstances to align it with their financial capacity.
The main procedures for capital reduction in limited liability companies are as follows:
1. The board of directors formulates a capital reduction plan.
2. Shareholders' meeting passes a resolution on the company's capital reduction.
3. Shareholders sign a capital reduction agreement based on actual circumstances.
4. Prepare a balance sheet and asset inventory, notify creditors, and make public announcements.
5. Repay debts or provide corresponding guarantees as required by creditors.
6. Modify the company's Articles of Association.
7. Complete the company's registration for the changes.
Deregistration
When a company is newly established and has no immediate business requirements or when an existing company has been poorly managed for a long time, considering deregistration may be a viable option. The shareholders can then consider registering a new company when there is a genuine commercial need in the future.
Generally, according to the provisions of the Company Law, the basic process for a company to exit the market includes resolution for dissolution, liquidation and distribution, and deregistration. Before the official termination of the company, it is necessary to legally declare dissolution, establish a liquidation team to carry out the liquidation process, clear the company's assets, pay taxes, settle debts, pay employee salaries, social insurance fees, etc. After the completion of the liquidation, a liquidation report should be prepared, and the deregistration of the company should be processed, announcing the termination of the company.
With the adoption of the new Company Law, the State Administration for Market Regulation, the General Administration of Customs, and the State Taxation Administration have recently issued the "Business Deregistration Guidelines (Revised in 2023)". These guidelines include content on the deregistration of non-corporate legal entities, partnership enterprises, sole proprietorships, agricultural professional cooperatives, individual industrial and commercial households, and other operating entities. They strengthen the precise and personalized guidance for the deregistration procedures of different types of operating entities.
For companies that have not incurred any debts or have fully settled their debts (excluding listed joint-stock companies), a specifically simplified deregistration procedure has been proposed to streamline the process.
The general steps for processing are as follows:
- Qualified enterprises submit an application for deregistration on the "Online Registration" platform or the "Simple Deregistration Notice" column of the National Enterprise Credit Information Publicity System. They proactively publish information regarding their intention to apply for simplified deregistration registration, along with a commitment from all investors. The public notice period is 20 days.
- During the public notice period, relevant stakeholders and government departments can raise objections and provide brief justifications through the "Objection Message" function in the "Simple Deregistration Notice" column of the National Enterprise Credit Information Publicity System. After the public notice period, no further objections are accepted through the public notice system.
- The tax department, after receiving the deregistration registration information forwarded by the market supervision department through information sharing, should verify the relevant tax and social insurance payment situations in accordance with the prescribed procedures and requirements.
In summary, the five-year period requirement for registered capital stipulated in the new Company Law entails a shorter timeline for shareholders to meet their contribution obligations. Shareholders no longer enjoy an extended deadline for fulfilling their obligations. In light of this, existing companies should carefully decide on the best approach for a smooth transition based on their specific circumstances. It can be anticipated that the State Administration for Market Regulation has expressed its intention to "further optimize the procedures and processes for deregistration and capital reduction". Therefore, it is likely that there will be legal regulations or policies introduced in response to the issue of the five-year contribution deadline for existing companies.
