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Withdrawal of capital contribution refers to the behavior of shareholders who secretly withdraw the capital contribution after the company's capital verification and registration, but still retain the identity of the shareholder and the original capital contribution amount. This behavior will lead to the decrease of the company's property. How to distinguish between the normal transaction behavior of the company providing guarantees for shareholders and the behavior of withdrawing capital contributions?

I.Determination of Withdrawal of Capital

Article 35 of the "Company Law of the People's Republic of China" (hereinafter referred to as the "Company Law") stipulates: "After the establishment of the company, shareholders will not withdraw their capital contributions."

Article 12 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the "Company Law of the People's Republic of China" (3)" (hereinafter referred to as the "Company Law" Judicial Interpretation (3)) stipulates: "After the establishment of the company, the company, shareholders or company, if the creditor requests that the shareholder withdraw the capital contribution, as result, that the relevant shareholder’s behavior meets one of the following circumstances and damages the company’s rights and interests, the people’s court will support it: (1) Preparing false financial accounting statements for distribution of inflated profits; (2) Passing fictitious creditor's rights and debt relations to transfer out their capital contributions; (3) Using affiliated transactions to transfer out capital contributions; (4) Other acts of withdrawing capital contributions without legal procedures."

In combination with the above regulations, two requirements should be met for determining the withdrawal of capital contributions:

One is the act of "fleeing". The shareholders who withdrew their capital contributions did not pay fair and reasonable consideration to the company when they transferred their capital contributions or corresponding assets from the company, or failed to deliver equivalent assets or rights and interests to the company.

The second is the result of damage. The actions of the shareholders have harmed the company’s rights and interests and reduced the company’s assets for debt repayment. In addition, in practice, the behavior of withdrawing capital usually fails to strictly follow the procedures stipulated in the statutory or the company's articles of association, and the relevant resolutions are not made due to due process and cannot reflect the company's will.

II. Distinguish between the company’s guarantee for shareholders and factors to consider for evasion of capital

On August 18, 2012, Chen X(holding a 60% equity in Company A) was the equity transferor, and Hu X(holding a 40% equity in Company A) was the equity transferee. He signed the "Equity Agreement" and agreed that Chen X would be holding 60% of the shares in Company A (Chen’s investment of 64.2 million yuan in Company A and shareholders’ equity) was transferred to Hu for a price of 96 million yuan. Article 2, paragraph 4 of the "Equity Agreement" also stipulates that Company A promised to bear joint and several liabilities for the above-mentioned payment (including principal and interest) of Hu X.

After Hu X owed 18.15 million yuan and interest for the equity transfer, Chen X brought a lawsuit to the court. Among them, one of the litigation claims is to require Company A to bear joint liability. The court of first instance rejected the request, and Chen X refused to accept it and appealed to the Higher People's Court of Fujian Province.

The Higher People’s Court of Fujian Province held that in this case, Chen X did not retain the shareholder status and the original amount of capital contribution in the equity transfer, and the obligation to pay the equity transfer in this case was Hu X. Company A’s guarantee responsibility was a contingent debt. It does not necessarily happen. Even if Company A assumes the responsibility of guarantee, it has the right to claim compensation from Hu X, and this will not lead to the inevitable reduction of the company's property. Therefore, in this case, there was no circumstance in which the contract clauses were invalid due to violation of mandatory legal provisions. Therefore, the court of first instance determined that Chen X used his identity as the legal representative of Company A to provide guarantee for his own equity transfer, infringing on the company’s property rights and infringing the company’s external creditors’ reliance on the company’s capital status based on public registration. The company’s guaranty was invalid and there was no basis in law. The court of second instance ruled that Company A will bear joint and several liability for Hu X’s payment obligations.

Company A refused to accept the judgment of the court of second instance to bear joint liability and applied for a retrial. The Supreme People's Court rejected its application for retrial. (Case source: China Judgment Document Network)

Based on the above cases, it can be seen that three factors can be considered to distinguish between the company’s guarantee for shareholders and the withdrawal of capital contributions:

One is the probability of guarantee liability. Under normal circumstances, the company’s responsibility for guarantees is probable and does not necessarily happen. Only when the shareholders fail to perform the debts, the company assumes the guarantee responsibility, and the company has the right to recover from the shareholders because of the guarantee responsibility. Will not lead to the inevitable reduction of the company's assets. However, if the shareholder’s debt is fictitious or the shareholder is obviously not capable of fulfilling the debt, it is more likely to withdraw capital.

The second is the relationship between creditors and shareholders. If the shareholder’s creditor has an associated relationship with the shareholder, and the shareholder’s capital contribution is paid to the creditor because the company assumes the guarantee responsibility, the suspicion of withdrawing the capital is greater.

The third is the legitimacy of the decision-making process. According to the provisions of paragraphs 2 and 3 of Article 16 of the "Company Law": "Where a company provides guarantees to the company’s shareholders or actual controllers, it must be resolved by the shareholders’ meeting or the shareholders’ meeting. The shareholders specified in the preceding paragraph may be subject to the Shareholders dominated by the prescribed actual controller shall not participate in the voting on the matters specified in the preceding paragraph. The voting will be passed by more than half of the voting rights held by other shareholders present at the meeting." The company guarantees shareholders that if the resolution procedures are strictly followed in accordance with the above regulations, the company will withdraw, the possibility of capital contribution is less.

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Statement:

This article was originally created by the lawyers of JAVY Law Firm. It only represents the author's own views and should not be regarded as a formal legal opinion or suggestion issued by JAVY Law Firm or her lawyers. If you need to reprint or quote any content in this article, please indicate the source.