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BACKGROUND
With the Company Law of the People's Republic of China (the “New Company Law”) coming into force on July 1, 2024, some of the provisions have triggered a lot of controversy in the process of practical application, the first of which is Article 88(1), which provides that a “one-size-fits-all” type of addition has led to many historical shareholders under the subscription system being “put at risk”, causing a series of problems. “The “one-size-fits-all” addition has led to a series of problems for many historical shareholders under the paid-in system. Due to its controversial nature, the Supreme People's Court issued the “Reply on the Non-retroactive Application of Paragraph 1 of Article 88 of the Company Law of the People's Republic of China” (Fa Shi [2024] No. 15, or “Reply No. 15”) at the end of December 2024, which made it clear that Paragraph 1 of Article 88 of the new Company Law would only apply to shareholders who have not yet reached the expiration date of their shareholding in the company after July 1, 2024 The first paragraph of Article 88 of the new Company Law is only applicable to the transfer of shareholdings occurring after July 1, 2024 before the expiration of the capital contribution period. Subsequently, the People's Court Casebook urgently published a number of typical cases to further clarify the rules for adjudicating such cases.

Recently, Tian Qiujing, a partner of JAVY Law Firm, and Wei Wei, a partner of JAVY Law Firm, handled a case of objection to the execution of the case, which started after the implementation of the new Company Law and before the issuance of No. 15 Approval, and the focus of the dispute in the case was the application of the first paragraph of Article 88 of the new Company Law. Due to the lack of judicial interpretation at that time, as one of the historical shareholders of the proxy lawyer, in the defense on the issue from the legality, reasonableness of multiple perspectives to carry out in-depth argumentation, and ultimately waited for the release of Approval No. 15. In the trial, the attorney for the other side of the claim to analyze and refute one by one, and finally the other side of the court said that the party can be withdrawn from the prosecution, the case was successfully concluded.

I. Introduction of the case
In 2023, a Beijing real estate company (“Company A”) sued a Beijing science and technology company (“Company B”), demanding payment from Company B. During the trial, the two parties reached a mediation, and the court issued a civil mediation. Afterwards, Company B failed to execute the conciliation, Company A applied to the court for compulsory execution, and the court ruled to terminate the execution, and Company A (the creditor and the plaintiff of the case) filed an execution objection to the court, which was rejected. Later, Company A filed a lawsuit against the execution (the “case”), requesting to add Company B (the debtor), the current shareholders and historical shareholders of Company B (the defendants in the case) as the executors.


Second, the focus of the analysis
As one of the defendants in this case, the historical shareholders of company B's attorney, the focus of the issue of analysis and argumentation, and issued the following main defense (at that time, the non-retroactivity of the approval has not yet been made, so part of the content of the reply is to analyze from the jurisprudence of the reasoning):
1. Debtor Company B still had property available for execution, and should not add shareholders without completing the execution of the company's assets.
Upon inquiry, the debtor company B is still in existence, and still has property. The properties that can be searched through public channels and have not yet been disposed of include: equity; registered trademarks; patents, etc. (such properties can be simply found from software such as Enterprise Search). Although the court issued a final decision, many of Company B's properties have obviously not been disposed of in any way, and the additional shareholders violated the principle of independence of company property and shareholder property.
2. Whether the former shareholders “failed to fulfill the obligation of capital contribution in accordance with the law”.
“Failure to fulfill the obligation of capital contribution in accordance with the law” is not the same as ‘no capital contribution’. In this case, the parties to the transfer of equity capital has not yet expired (2050 expiration), so does not have the obligation to pay the capital contribution, does not belong to the “failure to fulfill the obligation of capital contribution”.
3. It is unreasonable to require the former shareholders to bear the repayment responsibility.
First of all, the debtor company B debt even in the beginning of the transaction relationship, the party that is not company B shareholders, do not enjoy the rights and obligations of shareholders, more have no right to participate in the company's management, the occurrence of the debt is completely no fault. For the arrears of litigation case, the party did not participate in and do not know, coupled with the case is mediation, the party is not a party to the case, there is no right to litigation, and even no way to verify the facts of the case whether or not, whether or not the debt is true and so on. Under such circumstances, it is obviously unfair to require it to bear the responsibility of repaying the debt.
Secondly, the party in the transfer of equity, the rights and obligations as a contributor together transferred to the current shareholders. After the transfer of equity, it is the current shareholders rather than the original shareholders who are liable for the capital contribution of Company B. It is contrary to the basic principle of transfer of equity and generalized transfer of debts to require the original shareholders to bear the responsibility directly.

4. The application of article 88, paragraph 1, should take into account the reality of the situation, the subjective fault of the shareholders, the order of fulfillment, the social impact, the shareholders' right of recovery and other factors.
First of all, the new “company law” article 88 should be in consideration of the company's property really can't pay off the debt, the current shareholders really have no property can be paid under the premise of the former shareholders to cover.However, if applied mechanically, it will lead to the bona fide shareholders to be “extensively hit” and cause panic.Some of the provisions of the new Companies Law can be said to be “subversive” to the original system content, but at that time did not and could not have foreseen that there would be such a significant change.
Of course, there are some people who have previously used the contribution system to evade debts, causing adverse social impact.However, not to escape debt, normal equity transfer there are many, and the process of equity transfer, whether paid for the value of equity is a decisive impact, paid equity consideration is usually higher than unpaid equity consideration (unless the company due to insolvency and other reasons for the value of equity 0), if the former shareholders are based on the logic of determining the value of equity and the transfer, and then asked to bear the responsibility for the jurisprudence of the basis of the controversy.
Secondly, even if Article 88 of the new Company Law applies, it should be considered whether the former shareholders need to assume supplementary liability after the current shareholders have no property to pay the capital contribution, and the shareholders assuming supplementary liability should be given the right to recover from the current shareholders who have not paid the capital contribution.Otherwise, all corporate debtors and subsequent shareholders can be arbitrary “bad debt”, as long as the money is not paid, the former shareholders must “cover.
5. “The law does not apply retroactively” is the basic principle of legislative stability, supplemental liability must have a sequential order
I. Introduction of the case In 2023, a Beijing real estate company (“Company A”) sued a Beijing science and technology company (“Company B”), demanding payment from Company B. During the trial, the two parties reached a mediation, and the court issued a civil mediation.Afterwards, Company B failed to execute the conciliation, Company A applied to the court for compulsory execution, and the court ruled to terminate the execution, and Company A (the creditor and the plaintiff of the case) filed an execution objection to the court, which was rejected.Later, Company A filed a lawsuit against the execution (the “case”), requesting to add Company B (the debtor), the current shareholders and historical shareholders of Company B (the defendants in the case) as the executors.

Second, the focus of the analysis
As one of the defendants in this case, the historical shareholders of company B's attorney, the focus of the issue of analysis and argumentation, and issued the following main defense (at that time, the non-retroactivity of the approval has not yet been made, so part of the content of the reply is to analyze from the jurisprudence of the reasoning): 1. Debtor Company B still had property available for execution, and should not add shareholders without completing the execution of the company's assets. Upon inquiry, the debtor company B is still in existence, and still has property.
The properties that can be searched through public channels and have not yet been disposed of include: equity; registered trademarks; patents, etc. (such properties can be simply found from software such as Enterprise Search).Although the court issued a final decision, many of Company B's properties have obviously not been disposed of in any way, and the additional shareholders violated the principle of independence of company property and shareholder property. 2. Whether the former shareholders “failed to fulfill the obligation of capital contribution in accordance with the law”.
“Failure to fulfill the obligation of capital contribution in accordance with the law” is not the same as ‘no capital contribution’.In this case, the parties to the transfer of equity capital has not yet expired (2050 expiration), so does not have the obligation to pay the capital contribution, does not belong to the “failure to fulfill the obligation of capital contribution”.
3. It is unreasonable to require the former shareholders to bear the repayment responsibility.
First of all, the debtor company B debt even in the beginning of the transaction relationship, the party that is not company B shareholders, do not enjoy the rights and obligations of shareholders, more have no right to participate in the company's management, the occurrence of the debt is completely no fault.For the arrears of litigation case, the party did not participate in and do not know, coupled with the case is mediation, the party is not a party to the case, there is no right to litigation, and even no way to verify the facts of the case whether or not, whether or not the debt is true and so on.