(By Bai Lituan) On December 28, 2013, the 6th Meeting of the Standing Committee of the Twelfth National People’s Congress approved the Amendment to the Company Law of the People’s Republic of China. The Amendment has three highlights: replaced the paid-in system with the registered capital to-be-paid-in system, decreased requirements for capital registration and simplified registration items and files. No doubt amendment to laws aims at meeting the demand of economic development, then what did this Amendment to the Company Law positively signal?
1. Encouragement of Business Startup by Individuals
Plagued by the overall global economic decline, China is predicted to suffer a slowdown in economic growth in the next a few years with the biggest side effect of unemployment, a serious problem perplexing the current government. The officially implemented to-be-paid-in system introduces the creative method of revolution of the decision-making levels and way of supervision to lower the threshold of enterprise incorporation. The restriction on minimum registered capital and the former compulsory requirements on initial subscription of 20% registered capital with the balance fully paid in within 2 years, submitting capital verification reports, etc. were abolished to make enterprise incorporation more convenient and less expensive, reflecting the governmental intention to alleviate employment pressures by encouraging individuals to start up businesses.
2. Gradually Institution of a Credit System
Modern market economy is credit economy, in which business standing plays the most crucial, active and influential role. Therefore, the business standing system development is the most important part of the social credit system development. Under the to-be-paid-in system, any individual can afford to establish a company with registered capital of RMB 10,000,000 or even RMB 100,000,000, so the amount and subscription status of registered capital is no longer one of the major targets of investigation on business standing. Instead, in major transactions, investigation on shareholders’ backgrounds and credibility becomes the most important. The government will take dominant actions to gradually institute a credit system covering market entities (such as enterprises, shareholders, directors, high-level managers). Nobody wants to do businesses with a market entity suffering litigations, debts, unfulfilling obligations for a couple of times, does it? Creation of online access to all verdicts and enforcement results as recently requested by the Supreme People’s Court formed one step for institution of the credit system. The registered capital to-be-paid-in system replacing the paid-in system will definitely enhance credit awareness of enterprises, reduce transaction costs and raise resource allocation efficiency.
3. Abolition of Phrases like ‘Withdrawal of Subscribed Registered Capital’, etc.
The 3rd edition of the Judicial Interpretation on the Company Law released by the Supreme Court in 2010 provided considerable details on how to deal with overvalued capital subscription. Clauses on civil compensations accountable, for example, to shareholders involved in the withdrawal of subscribed registered capital will be no longer applicable to the registered capital to-be-paid-in system. Meanwhile, the Enterprise Registration Rules and other relevant administrative regulations should be revised correspondingly.
According to the Chinese Criminal Law, false declaration of registered capital constituted a crime if an enterprise registration applicant submitted false documents or resorts to other fraudulent ways to cheat registration officials and thus was successful in the registration and such a wrongful act concerned a considerable amount of registered capital, caused serious consequences or involved other circumstances of aggravation, shall be given a less than three years’ sentence or detained and / or fined for more than 1% but less than 5% of registered capital under the false declaration. With the Company Law being revised, names and interpretations of the crime aforementioned will be abolished correspondingly.
4. Embodiment of the “Market Decides” Principle
In the market economy, it depends on business entities themselves to decide how much and when to subscribe to ensure normal operation of their enterprises. To maintain continuous operation, market entities will surely try to obtain sufficient capital, so the government does not need to intervene at all. The government can impose administrative and criminal punishments on those who infringe consumers’ rights and benefits or creditors’ interests.
It’s the universal law applying to the market economy that markets determine resource allocation. Resources are allocated most efficiently through the market mechanism. This Amendment to the Company Law embodied the principle that the reform of the economic system is the key to the comprehensive reform and the core issue is to properly handle the relationship between the government and the market, having the market play a decisive role in the allocation of resources, which was pointed out at the third plenary session of the eighteenth central committee of the Communist Party of China.
The Amendment convinced us that procedures of incorporation, annual business check, etc. of individually owned businesses, sole proprietorship corporates, partnership enterprises, etc. would be simplified and the abolition of three laws on foreign owned enterprises was around the corner. At this moment, we are more eager to see legislative and administrative authorities change the present taxation model radically by abolishing the notoriously unique invoice administration system.
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