News

Throughout the paradigm shift of the corporate capital system, the core of the system has always centered on the value game between "capital credit" and "asset credit".20 The revision of the Company Law in 2024 marked the deep transformation of China's corporate capital system from "formal credit" to "substantive credit", and the revision has built a tighter capitalization risk prevention and control network by strengthening the obligation of the board of directors to call for capital contributions, establishing the system of shareholders' disqualification, and perfecting the system of responsibility of the directors, supervisors and managers. The amendment has built a tighter capitalization risk prevention and control network. However, under the double value tension of business environment optimization and creditor protection, the capital contribution risk presents a more complex pattern, which needs to be systematically deconstructed from the dimensions of legal doctrine and legal economics.

I. Legal Connotation and Institutional Traceability of Capital Contribution Risk

(I) Modern Transformation of the Three Principles of Capital

The principles of capital determination, capital maintenance, and capital invariance in the traditional company law theory are facing functional adjustments under the background of the contribution system. The principle of capital determination has been transformed from "mandatory statutory minimum capital" to "commitment of shareholders under the autonomy of their own will", but Section 47 of the Companies Act 2024 has essentially constructed the statutory binding force of "commitment of capital" through the mandatory requirement of "full and punctual payment". The principle of maintenance of capital, on the other hand, creates a dynamic maintenance mechanism through the prohibition of capital evasion and the restriction of profit distribution. It is worth noting that the principle of capital invariance has evolved into the "principle of capital variability", but the rigidity of the fulfillment of the obligation to make capital contributions has been strengthened by the introduction of the system of lost rights.

(ii) Reinterpretation of the Legal Nature of Capital Contribution Obligation

The shareholders' capital contribution obligation has both contractual and statutory attributes. From the contractual point of view, the capital contribution obligation originates from the company's articles of association and the shareholders' agreement, which constitutes a special contractual debt between shareholders; from the legal point of view, Article 47 of the Company Law elevates the capital contribution obligation to a legal obligation, forming the normative structure of "legalization of contractual obligations". This dual attribute has led to the composite characteristics of the liability system for capital contribution - not only the existence of liquidated damages among shareholders, but also the statutory liability to the company and creditors.2024 The new obligation of the board of directors to call for contributions was added in the amendment, in essence, the obligation to supervise the capital contribution was incorporated into the statutory duties of the company organs from the domain of the autonomy of the shareholders and the public law attribute of the obligation of capital contribution was strengthened. (iii) System of Regulatory Framework

(III) Systematic Analysis of the Regulatory Framework

The current regulatory framework presents a "three-dimensional" structure:

Pre-emptive control: risk prevention through the autonomy of the articles of association and the duty of the board of directors to call for contributions; mid-course corrective action: defect relief through the loss of rights system and the right to make up for the capital contribution; and post-course recovery of responsibility: the formation of a closed loop of responsibility through the supplemental liability of the shareholders, and the joint and several liability of the directors and supervisors.

This framework design reflects the modern company law concept of "autonomy in principle and mandatory exceptions", but there is still a normative gap in the areas of evaluation of non-monetary capital contributions and reasonableness of the contribution period.

II. Typological Deconstruction and Empirical Analysis of Capital Contribution Risks

(I) Valuation Risks of Non-Monetary Capital Contributions: From Formal Compliance to Substantive Fairness

1. Structural Deficiencies of the Valuation Mechanism

Article 48 of the current Company Law requires that non-monetary capital contributions be "appraised for valuation and shall not be overestimated", but there is a lack of guiding norms on the method of appraisal. In practice, when intellectual property contributions are valued by the income method, there are often over-optimistic forecasts of future earnings; when land use rights contributions are valued by the cost method, the depreciation of value due to planning changes is ignored. In the case of a listed company, the appraisal value of a shareholder's contribution of patented technology amounted to 120 million yuan, but the technology had lapsed due to non-payment of annual fees, exposing the lack of review of the integrity of the right in the appraisal procedure.

2. Difficulties in legal remedies for defective rights

The defective rights of the contributed property may lead to triple legal risks:

At the level of property rights: for the contribution of immovable property without registration of transfer, the company only enjoys the right of claiming debts, which is not able to counteract the bona fide third party; at the level of debts: for the contribution of equity with mortgages, the company obtains the rights limited to the right of others; at the level of intellectual property rights: the contribution of patents in common without obtaining the consent of the other co-owners may constitute a disposal without right. Intellectual property: the contribution of a joint patent without the consent of the other co-owners may constitute a disposition without right.

Although the 2024 amendments do not directly address the issue of defective rights, Article 52 provides a new remedy for the company - if a shareholder's capital contribution is inaccurate due to a defective right, the company may initiate a call for the loss of rights.

3. Dynamic risk of value fluctuation

The risk of value fluctuation is particularly prominent when contributions are made in the form of future-income property such as franchise rights and customer resources. A restaurant chain contributed with regional franchise rights, which was assessed based on the expected income of 30 stores, but only 12 stores were opened 1 year later due to changes in market policies, and the value of the contributed property shrunk by 60%. Such risk exposes the inadequacy of the current system to regulate "reasonable at the time of contribution and subsequent depreciation", and the urgent need to establish a mechanism to compensate for the depreciation of value.

(ii) Abuse of Term Benefits under the Contribution System: From Freedom of Autonomy to Credit Crisis

1. "Strategic Design" of Capital Contribution Periods

Shareholders often abuse term benefits through two tactics:

by over-lengthening the period: by setting a 99-year capital contribution period, which essentially defers the obligation to make the capital contribution to the termination of the company; and by illusory conditions: by agreeing to almost impossible conditions, such as "making the capital contribution after the company has gone public".

This design led to the "bubbling" of the company's capital credit. A financial leasing company with a registered capital of RMB 1 billion and a paid-in capital of only RMB 5 million conducted a business of RMB 200 million, which ultimately led to group litigation due to insolvency, highlighting the serious disconnect between the "function of capital disclosure" and the "actual solvency" under the contribution system.

2. Judicial Dilemma of Accelerated Maturity of Capital Contributions

There are three adjudication positions in judicial practice on accelerated maturity of capital contributions in non-bankruptcy situations:

Strict Statutory Doctrine: only recognizing bankruptcy and dissolution situations stipulated in Article 35 of the Enterprise Bankruptcy Law and Article 22 of Interpretations of the Company Law (II); Reasonable Expectation Exception: when a company's debt is incurred, the creditors can expect accelerated maturity of shareholders' capital contributions; and Significantly Undercapitalized Criteria: When there is a serious mismatch between the company's assets and the scale of its operations, the term interest may be breached.

The 2024 amendments did not clarify the non-bankruptcy acceleration rule, resulting in the phenomenon of different judgments in the same case still exists. For example, one case held that if a shareholder maliciously extends the period of capital contribution after the company's debt is incurred, the creditor may claim acceleration of maturity; while another case insisted on strict statutoryism and refused to break the term interest.

(iii) Evolution of the concealment of capital evasion: from direct transfer to option transaction

Traditional means of evasion (e.g., fictitious borrowing, connected transactions) have been gradually replaced by more covert ways:

Betting agreement-type evasion: shareholders recover the capital contribution in the name of "compensation payment" by signing a "performance betting agreement" with the company in the event of failure to meet the performance conditions; Option exercising-type evasion: shareholders set up a shell company as an option transferee to transfer company assets through a low-priced exercise of options to transfer the company's assets; fictitious service-type absconding: shareholders' affiliates charge high service fees in the name of "consulting services" and "technical support".

The case of a science and technology company showed that the shareholder, through a wholly-owned subsidiary, signed a Technology Development Contract with the target company, agreeing to pay a development fee of 50 million yuan, but actually did not carry out any research and development, and the funds ultimately flowed back to the shareholders' account, and this type of behavior has exceeded the scope of the determination of the traditional means of absconding and has posed a challenge to the judicial determination.

Legal reconstruction and judicial application of the liability system

(A) The gradient configuration of the shareholders' liability

1. The fulfillment of the responsibility of making up the contribution

When the shareholders' contribution is defective, the liability should follow the gradient rule of "priority of the company and supplementation of the creditors":

Direct liability to the company: the shareholders should make up the full amount of the contribution to the company firstly, which is absolute and cannot be extinguished due to the survival or non-survival of the company; Supplementary liability to the creditors: the creditors can claim the liability of the shareholders within the range of the interest on the unpaid capital only if the company has insufficient assets to satisfy the debt. Supplementary liability to creditors: only in the company's property is not enough to settle debts, creditors can claim shareholders in the unprovided capital interest within the scope of liability.

It is worth noting that, when more than one shareholder has defective capital contribution, the scope of responsibility should be differentiated: those with insufficient monetary contribution shall be liable for the full amount, those with overestimated non-monetary contribution shall be liable for the overestimated difference, and those who have evaded capital shall be liable for the evaded amount, so as to avoid undue expansion of joint and several liabilities.

2. Calculation of Interest Liability

The current regulations are ambiguous on the calculation of interest:

Starting point: the interest for failure to make contributions on time shall be calculated from the day following the expiration of the payment period agreed in the articles of incorporation; interest rate standard: the judicial practice refers to the calculation of the LPR, but the amendment of 2024 has not clarified whether the overdue interest is punitive or not. It is suggested to differentiate between general contribution defects and malicious defaults: the LPR standard should be applied to ordinary delinquency, and Article 585 of the Civil Code should be used to support the defaulting party to bear the interest rate higher than the LPR, so as to enhance the deterrent effect.

(II) Clarification of the Boundary of Directors' and Supervisors' Responsibilities

1. Performance Standard of Call Obligation

The board of directors' obligation to make a call needs to satisfy the requirement of "diligence and due diligence":

Procedural elements: the call should be made in writing and recorded in the board resolution; Substantive elements: the target of the call should be specific, the amount of the call is clear, and the period of the call is reasonable (it is recommended to refer to the "reasonable period of time" for the procedure of loss of rights in Article 52 of the Company Law, which is 60 days).

In the case of a listed company, although the board of directors issued a reminder notice, it did not specify the specific payment account, which resulted in the shareholders not being able to fulfill it, and the court found that the board of directors had not fully fulfilled its reminder obligation, and the relevant directors were liable for damages.

2. Objective standards for fault determination

The principle of fault liability applies to the responsibility of directors and supervisors, and the following standards can be used to determine fault in judicial practice:

Professional standards: the CFO has a higher duty to examine the authenticity of monetary contributions; industry standards: the directors of hi-tech enterprises should have the basic ability to make technical judgments on the intellectual property rights contributions; and information standards: the directors' failure to inspect the company's financial statements resulting in the failure to detect the absconding of the capital contribution The information standard: a director's failure to review the company's financial statements, resulting in the failure to detect capital flight, constitutes gross negligence.

The new Article 51 added in the 2024 amendment legalizes the obligation to call for contributions, which essentially raises the standard of directors' and supervisors' duty of care, and transforms it from the "duty of good stewardship" to the "duty of strict diligence".

(III) Procedural Deconstruction of the Loss of Rights System

1. Statutory Requirements of the Loss of Rights Procedure

The shareholders' loss of rights needs to satisfy the "triple statutory conditions":

Factual Requirement: the shareholders fail to pay the capital contribution in full on time; Procedural Requirement: the board of directors resolves to call for the capital contribution, notifies in writing, and grants a reasonable period of time; Consequential Requirement: the shareholders fail to pay the capital contribution within the grace period.

In particular, it should be noted that the determination of "reasonable period" should take into account the amount of capital contribution and the company's business needs: a grace period of 15 days can be set for small capital contribution, and the grace period for large capital contribution (e.g., more than 10 million yuan) can be extended to 60 days, but the maximum length of time should not be more than 90 days, so as to avoid the loss of right procedure becoming a tool for the bad faith shareholders to exclude the dissenting parties.

2. Disposal Rules of Lost Equity

Disposal of lost equity shall follow the principle of "prioritizing efficiency and taking into account fairness":

internal transfer priority: the company may require other shareholders to purchase lost equity in accordance with the ratio of capital contribution on a preferential basis; supplemental to the public transfer: when there is no one to purchase the equity internally, the equity may be transferred through the property rights exchange publicly; and the reduction of capital to cover the bottom line: when the transfer is not possible, the capital shall be reduced according to the law, so as to avoid the increase of the capital.

In the case of a limited liability company, the company did not dispose of the equity in time after the shareholders lost their rights, resulting in the mismatch between the company's capital and the scale of operation, and the court found that the company should bear the corresponding responsibility, highlighting the importance of the disposal procedure after the loss of rights.

Diversified Paths and Institutional Innovations for Risk Prevention and Control

(A) Endogenous Prevention and Control of Corporate Governance

1. Design of "Smart Clauses" in the Articles of Incorporation

It is recommended to embed dynamic contribution clauses in the articles of association:

Trigger contribution mechanism: it is agreed that if the company's gearing ratio exceeds 70%, the unexpired contribution will expire in advance; laddering contribution arrangement: according to the percentage of the company's annual revenue growth, the amount of shareholders' annual contribution will be determined; and wagering adjustment clause: if the value of assets depreciates by more than 30% within 3 years after the non-monetary contribution is made, shareholders are required to make up for the difference.

A technology company has effectively resolved the contradiction between start-up capital demand and long-term capital contribution pressure by agreeing in the articles of association that "for every 100 million yuan of revenue, shareholders shall contribute 10% of the capital contribution in proportion to their shareholdings".

2. Construction of a "dual-track system" for capital contribution auditing

Establish a dual auditing mechanism of legal and technical auditing:

Legal auditing: focusing on the examination of proof of ownership and the legality of the appraisal procedure; technical auditing: introducing external experts to assess the substantive value of intellectual property rights and franchises.

Reference can be made to the "independent financial advisor" system in mergers and acquisitions and reorganizations of listed companies, which requires that if the amount of non-monetary capital contribution exceeds 30% of the company's registered capital, an appraisal institution with securities and futures qualifications shall be hired, and a special opinion shall be issued by an independent director.

(ii) Remedy Innovations for Creditor Protection

1. "Penetrating" Disclosure of Capital Contribution Information

It is proposed to construct a three-tier disclosure system:

Basic Tier: Disclosure of subscription and paid-in information by the Enterprise Credit Information Publication System; Deepening Tier: Disclosure of valuation methodology and key parameters of non-monetary capital contribution in the company's annual report; Early Warning Tier: Trigger additional disclosure obligations when the company's liabilities exceed two times its paid-in capital.

A region piloted the "capital credit two-dimensional code", which allows creditors to scan the code to obtain information on the company's contribution history and valuation report summaries, effectively reducing information asymmetry.

2. A "three-dimensional toolkit" for creditor protection

Creditors can comprehensively utilize a variety of tools to prevent and control risks:

Capital contribution defect guarantee clause: agree in the contract that creditors can directly claim rights from shareholders if their capital contribution is inaccurate; financial supervision clause: agree in major contracts on the creditor's right to enquire into the company's finances; and accelerated maturity waiver: make clear that the shareholder's obligation to contribute capital expires earlier when the company fails to meet its debt obligations on time ( Attention needs to be paid to the coordination with the statutory acceleration conditions).

(III) Synergistic Optimization of Judicial and Regulatory Control

1. Typological Construction of Adjudication Rules

The Supreme Court should clarify the following adjudication standards through guiding cases:

Overvaluation of Non-Monetary Contributions: if the appraised value exceeds the actual value by more than 20%, it is presumed to be overvalued; Reasonableness of Capital Contribution Period: if the period of contribution is more than the normal lifespan of the shareholders, it is presumed to be unreasonable; Directors' Obligation to Call for Contributions: if the notice of call for contribution is not issued within 1 month after the expiry of the period of contribution, it is presumed to be unreasonable. Reasonableness of contribution period: it is deemed unreasonable if the contribution period exceeds the normal life cycle of a shareholder.

2. Digital Transformation of Regulatory Mechanisms

It is proposed to build a "capital contribution risk early warning platform" to identify high-risk behaviors through big data analysis:

Abnormal Indicators: the difference between the registered capital and paid-in capital exceeds RMB 50 million and the period exceeds 5 years; Related Alert: the same shareholder has a record of defective capital contribution in more than 3 companies; Behavioral Recognition: frequent changes in the registered capital within a short period of time and the paid-in capital is zero.

The platform can be docked with the credit system to implement joint disciplinary measures for high-risk subjects, such as restricting the directors and supervisors from serving as directors and supervisors, and controlling the amount of financing.

V. Conclusion:Reconstruction of Capital Credit and Modernization of Company Law

The evolution of the company capital contribution system has always been centered on the value balance of "efficiency and security".2024 The revision of the Company Law has constructed a more sophisticated risk prevention and control system through institutional innovation, but in the face of the complexity of the business practice, it is still necessary to seek breakthroughs in theoretical innovation and institutional improvement. In the future, the development of company law should further strengthen the concept of "substantial credit of capital", and through the multiple synergies of corporate governance, judicial remedies and regulatory innovations, build the cornerstone of capital credit of the company, and provide a solid institutional guarantee for the high-quality development of the market economy.