Perspective | The Supreme Court's approval of the new Company Law Article 88, Paragraph 1 not being retroactive may make it difficult for historical shareholders under the old law to obtain a "get-out-of-jail-free card."

The new Company Law, which will be implemented on July 1, 2024, stipulates in Article 88, Paragraph 1: "If a shareholder transfers equity that has been subscribed but not yet reached the capital contribution deadline, the transferee shall bear the obligation to pay the capital contribution; if the transferee fails to pay the capital contribution in full and on time, the transferor shall bear supplementary responsibility for the unpaid capital contribution." The concurrently implemented "Several Provisions of the Supreme People's Court on the Temporal Effect of the Application of the Company Law of the People's Republic of China" states in Article 4 that the new Company Law, Article 88, Paragraph 1 has retroactive effect.

After the implementation of the new law, there has been a surge in cases where creditors have added historical shareholders as defendants, leading to significant social debate and controversy. Many historical shareholders have protested, claiming that under the background of the old law's full subscription system, the retroactive application of this provision leads to lifelong responsibility, causing everyone to feel insecure. Meanwhile, company creditors argue that this move helps protect their legitimate rights and interests and prevents shareholders from evading legal responsibilities through improper means. It is reported that some local high courts have issued notices to suspend the enforcement of Article 88, Paragraph 1.

On December 22, 2024, the Legislative Affairs Commission of the Standing Committee of the National People's Congress submitted a report on the review of the filing and examination work in 2024, which reviewed the judicial interpretation of the application of Article 88 of the Company Law and concluded that the new Company Law's Article 88 does not have retroactive effect, urging the Supreme People's Court to take appropriate measures for proper handling.

On December 24, 2024, the Supreme People's Court issued a reply clarifying that "Article 88, Paragraph 1 of the Company Law of the People's Republic of China, effective from July 1, 2024, only applies to equity transfer actions that occur after July 1, 2024, which have not yet reached the capital contribution deadline."For disputes arising from shareholders transferring equity before July 1, 2024, which have not yet reached the capital contribution deadline, the people's courts should handle them fairly and justly according to the spirit of the original Company Law and other relevant laws.

The new Company Law's Article 88, Paragraph 1 fills the legislative gap regarding whether shareholders who transfer subscribed but not yet reached the capital contribution deadline still have capital contribution obligations. However, prior to the introduction of the new Company Law, there had already been a large number of cases where company creditors sought to hold historical shareholders accountable for capital contributions. Although many cases with differing standards of judgment emerged under the unclear legislation of the original Company Law, the judicial thinking had begun to unify before the implementation of the new Company Law.

This article attempts to analyze relevant cases before the implementation of the new Company Law. Although the Supreme Court has ruled that Article 88, Paragraph 1 of the new Company Law does not have retroactive effect, historical shareholders still face legal risks of being pursued for capital contributions by companies or creditors under certain circumstances.

Case Source: People's Court Case Database (Reference Case), Entry Number 2023-08-2-277-002
 

Judgment Key Points:Whether the transferor's capital contribution obligation transfers with the equity transfer when the capital contribution deadline has not yet been reached needs to further distinguish whether the transferor acted maliciously. In practice, this can be judged from multiple angles, such as whether the debt was formed before the equity transfer, the handover situation between the parties to the equity transfer, the actual operating conditions of the target company, whether there is a special relationship between the parties to the equity transfer, and the transfer price. If malice is determined to exist, the transferor should be ordered to bear joint and several liability to the transferee based on the theory of joint tort in civil law.

Case Source: People's Court Case Database (Reference Case), Entry Number 2023-13-2-161-005

Judgment Key Points:When Dai and Yang transferred their shares, the deadline for subscription had not yet reached. Even if the Yangzhou company constituted an infringement, they did not need to bear supplementary compensation responsibility. The court held that before the capital contribution deadline has expired, the original shareholders' failure to pay the capital contribution generally does not constitute a defect in capital contribution under company law. The Company Law of the People's Republic of China does not prohibit the transfer of shares by original shareholders before the capital contribution deadline. However, all shareholders should exercise their rights and obligations in good faith according to the law. According to Article 20, Paragraph 1 and Paragraph 3 of the Company Law, if the original shareholders, knowing that there is an infringement debt, maliciously transfer their unfulfilled capital contribution shares to evade debt, increasing the risk that the company's registered capital cannot be fully paid, which obviously harms the interests of creditors, such malicious transfer behavior constitutes an abuse of the benefits of the capital contribution deadline to evade debt, and they should bear corresponding legal responsibilities for the infringement debt prior to the transfer.

Case Source: Top Ten Commercial Cases of National Courts in 2020, Intermediate People's Court of Qingdao City, Shandong Province, (2020) Lu 02 Min Zhong 12403.

Judgment Key Points:The second-instance court held that Tongshun Company and Zhou should bear joint liability for the debts involved within the scope of their capital contributions. In the case where the debt was formed when the shareholders held shares, and the company was deregistered before the capital contribution deadline, according to Article 22, Paragraph 2 of the Judicial Interpretation (II) of the Company Law and Article 65 of the Contract Law (now invalid), the former shareholders should bear joint and several liability within the scope of their capital contributions.On one hand, from the perspective of the timing, the contractual debts involved in this case arose when Tongshun Company and Zhou Mou Ru held shares. At the time of the equipment sales contract between Zhuxin Company and Zhulong Company, Tongshun Company and Zhou Mou Ru were shareholders, and both shareholders enjoyed the benefits brought by the sales contract to the target company. When the equity transfer occurred, they should have been aware of the company's debts. On the other hand, in the case of company deregistration, the capital contribution obligations that Tongshun Company and Zhou Mou Ru were exempted from due to the transfer of shares should be reversed. The main reason is that in this case, the subsequent shareholder Xu Mou Qin has deregistered the company, and his capital contribution obligation has accelerated to maturity, and he has not made any contributions. According to Article 65 of the (invalid) Contract Law, if the parties agree that a third party will perform the debt to the creditor, and the third party fails to perform the debt or performs it in a manner that does not comply with the agreement, the debtor shall bear the liability for breach of contract to the creditor. Under the framework of company law, shareholders can transfer shares without the consent of the target company. For the contractual obligations of capital contributions, after the transfer to the subsequent shareholders (transferees), their failure to contribute on time and the deregistration of the company means that the subsequent shareholders have a contractual obligation to pay the company for the capital contribution upon the expiration of the contribution period. In the case of non-performance, it falls under the situation where the third party fails to perform the debt as stipulated in the above legal provisions, thus the company can claim breach of contract liability from the previous shareholders (creditors).

Case Source: Judgment Document Network, Guangdong High People's Court, (2021) Yue Min Zhong 1071.

Judgment Key Points:The company is responsible for its debts with all its assets, and the registered capital reflected by the shareholders' subscribed capital is part of the company's assets. It is also an important basis for the counterparty to assess the company's ability to repay debts and measure transaction risks. Whether it is a subscribed system or a paid-in system, it does not change the legal setting that the registered capital of the company is the basis for the company's external liabilities. Chinese laws and regulations do not prohibit shareholders from transferring shares before the subscription period expires, but the freedom of share transfer and the exercise of shareholders' time-limited interests cannot harm the interests of the company and its creditors. Shareholders' contributions to the company have both contractual and statutory attributes and do not automatically transfer with the transfer of shares. If the company is unable to pay externally, allowing shareholders who have not yet reached the contribution deadline to evade their contribution obligations through share transfers effectively circumvents the legal restrictions on company capital, which may reduce the company's repayable assets or allow shareholders to escape their contribution obligations through share transfers, ultimately harming the economic transaction order, which is clearly not the original intention of the subscribed system.

Case Source: Judgment Document Network, Wuxi Intermediate People's Court, Jiangsu Province, (2018) Su 02 Min Zhong 1516.

Judgment Key Points:In this case, although the articles of association of China Railway Logistics Company stipulate that the registered capital adopts a subscribed system, the original shareholder China Railway Group can subscribe before May 28, 2044, but the debts involved in the case were all formed before China Railway Group transferred its shares. As the sole shareholder of China Railway Logistics Company during the formation of the above debts, China Railway Group did not make any contributions to China Railway Logistics Company, and after the debts were confirmed by the court's effective judgment, it did not actively fulfill its obligations but instead transferred the shares of China Railway Logistics Company to Yuanda Company at zero consideration. Before the transfer of shares by China Railway Group, the registered capital of China Railway Logistics Company remained zero, and the company's assets were in a state of being unable to repay the debts involved. Therefore, this court believes that China Railway Group had already triggered its contribution obligation before the transfer of shares. The transferee Yuanda Company, when acquiring the shares, was aware that its predecessor shareholder China Railway Group had not made contributions, and after acquiring the shares, it also did not contribute to China Railway Logistics Company. Therefore, Yuanda Company and China Railway Group should bear joint liability for the company's debts at the time of the share transfer within the scope of the subscribed capital.

After in-depth exploration of related series of cases, it can be found that in recent years, the judgment results have shown a distinct tendency. Specifically, when there is a transfer of shares before the subscription deadline, from the perspective of legal principles, the original shareholders are protected by the legitimate rights and interests brought by the subscription deadline. At the specific point of implementing the share transfer, there is no immediate and actual requirement for the payment of contributions at the company level. In other words, according to general judicial adjudication criteria, original shareholders are usually not required to bear contribution responsibilities. The act of transferring shares before the subscription deadline does not constitute the situation of "not fulfilling or not fully fulfilling the contribution obligation before transferring shares" as stipulated in Article 13 and Article 18 of the Supreme People's Court's Provisions on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III).

Of course, this is not an absolute determination. If during judicial review or evidence collection, it can be conclusively shown that the true motive of the historical shareholders for implementing this share transfer was malicious, that is, they intended to deliberately evade the contribution obligations they should bear through the transfer of shares, then in this special circumstance, historical shareholders would find it difficult to use the time-limited interests to defend against liability and must face the issue of bearing contribution responsibilities.

The cases included in the People's Court case database also provide guidance, indicating that whether there is malicious intent to harm the company or creditors can be judged from multiple angles, such as whether the debt was formed before the share transfer, the handover situation between the parties to the share transfer, the actual operating conditions of the target company, whether there are special relationships between the parties to the share transfer, and the transfer price. If malice is determined, the transferor should be ordered to bear joint liability for compensation to the transferee based on the theory of joint tort in civil law. It can be seen that the reply issued by the Supreme People's Court clearly states that the first paragraph of Article 88 of the new Company Law does not have retroactive effect, but the People's Court should fairly and justly handle matters such as share transfers that occurred before the implementation of the new Company Law according to the spirit of the original Company Law and other relevant laws. This means that for matters such as share transfers that occurred before the implementation of the new Company Law, historical shareholders cannot simply use the non-retroactive nature of this provision as a "shield" to evade responsibility. They still need to comply with the effective laws and regulations at that time, combined with the commercial background and behavior of the share transfer, to accept corresponding scrutiny and bear corresponding obligations and responsibilities, and it is impossible to easily escape legal regulation based on this reply.