(By You Yunting) In the end of 2013, China issued a revised Corporate Law updating the provisions about the contributed capital, as discussed in our previous post the Amendment to the Corporate Law. Today we will discuss the legal liabilities of promoters and shareholders with regards to the required contributed capital being surreptitiously withdrawn.
Assumption of liability
Pursuant to the updated Corporate Law, any shareholder who fails to make full payment of the capital contributions at the establishment of the company shall be jointly and severally liable for refunding the paid-in capital – in accordance with the amount of registered capital. As such, it is when the company is unable to pay its debts that the shareholders shall assume the liability of surreptitiously withdrawing the contributed capital.
Common forms of surreptitiously withdrawing contributed capital
Based on the introduction of Baidupedia (note: the link is in Chinese), in judicial practice, the main forms that withdrawing contributed capital may take are:
1. Remitting the payment of the capital contribution to pay for a debt owed by the contributor, or the debt of another, upon verification of capital contribution. Generally, any promoter or shareholder who uses a loan to pay the registered capital will remit out the capital giving it back to the owner after the establishment of the company.
2. Remitting out the payment of capital contribution without justifiable reason not due to normal operations or business expenses.
3. Returning the capital in kind to its owner upon the establishment of the company.
4. Remitting out the capital in kind, or as intellectual property rights, patents, non-patented technology or land-use rights transferred into the company account free of charge or at unfairly low prices as compared to the market value.
Legalized forms of surreptitiously withdrawing the contributed capital
Pursuant to the Rules of the Supreme People’s Court on Some Issues Concerning the Application of Company Law of the People’s Republic of China (III), where, after the company is established, the company or any creditor of the company claims against any shareholder for withdrawal of capital contributed on the grounds that any act of the shareholder that conforms to any of the following circumstances will injure the interests of the company and would be sustained by the People’s Court .
1) Preparing false financial statements to increase non-existing profits and distribute the same;
2) Remitting out the contributed capital by making up false credit-debt relations;
3) Remitting out the capital it contributed through connected transactions; or
4) Any other acts that withdraw the capital without due legal process.
Legal Liabilities of surreptitious withdrawing the contributed capital
1) Criminal liability:
Article 159 of the Criminal Law stipulates that, any sponsor or shareholder of a company who, in violation of the provisions of the Company Law, makes a false capital contribution by failing to pay the promised cash or tangible assets or to transfer property rights, or surreptitiously withdraws the contributed capital after the incorporation of the company shall, if the amount involved is substantial and the consequences severe, or other serious circumstances exist, be sentenced to a fixed-term imprisonment of not more than five years or criminal detention or shall only be fined not less than two percent but not more than ten percent of the false capital contribution of the amount of the capital contribution surreptitiously withdrawn.
Where a unit commits the crime as mentioned in the preceding paragraph, it shall be fined, and the persons who are directly in charge, and other persons who are directly responsible for the crime shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.
2) Administrative liability:
Article 199 of the Corporate Law stipulates that. any promoter or shareholder of a company who makes any fraudulent capital contribution or fails to deliver or fails to promptly deliver the money or non-financial assets to be used as a capital contribution, shall be ordered by the Company Registration Authority to remedy the defect and shall be fined between 5% and 15% of the purported value of the fraudulent capital contribution.
Article 200 of the Corporate Law also stipulates that any promoter or shareholder who unlawfully withdraws their capital contribution after the company is incorporated shall be ordered by the Company Registration Authority to remedy the defect and shall be fined between 5% and 15% of the capital contribution unlawfully withdrawn.
3) Civil liability:
The civil liabilities include the following:
Firstly, the company is entitled to claim that any shareholder who withdraws the contributed capital contribution is responsible for refunding the capital and assuming the liability for damages thereby caused.
Secondly, any other shareholder who fulfils its obligation of a capital contribution has the right to claim that a shareholder who withdraws its capital contribution should completely fulfill its obligation by returning the capital contribution and also to assume liability for any damages thereby caused to the company.
Finally, any creditor of the company has the right to claim that the said shareholder who withdraws the contribution should assume liability of compensation to the extent of capital withdrawn.
Lawyer Contacts
You Yunting：86-21-52134918 youyunting@debund.com/yytbest@gmail.com
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