Shareholder responsibilities in bankruptcies under new Company Law

The new Company Law, effective from 1 July 2024, has significantly impacted commercial entities, with shareholder responsibilities regarding capital contributions capturing the most attention. This article examines the duties of shareholders in companies that have entered bankruptcy liquidation or reorganisation under the new law, clarifying the boundaries of their responsibilities.

Capital contribution responsibilities

Accelerating shareholders’ capital contribution benefiting all creditors. Article 35 of the Enterprise Bankruptcy Law stipulates scenarios where shareholder’s capital contributions may be accelerated in the context of corporate bankruptcy. Under the new Company Law, article 54 allows the company and creditors with due claims to demand that shareholders who have subscribed but not yet reached their contribution deadlines make early payments, even if the company has not entered bankruptcy proceedings.

Once bankruptcy proceedings commence, all company debts, including those not yet due, are considered due upon acceptance of the bankruptcy application. Consequently, the scope of creditors benefiting from accelerated shareholder capital contributions expands to include all company creditors.

Administrator investigates company assets, shareholders held accountable for capital deficiencies. Upon acceptance of a bankruptcy case, the administrator takes control of the company’s assets, seals, books and documents, thoroughly investigating shareholders’ capital contributions. Any instances of false capital contributions or capital withdrawal will be fully exposed.

Historically, many regions have offered “one-stop services for capital verification and advanced payment” to attract investments, which will now face accountability from creditors and administrators.

In practice, similar cases have already emerged, such as Nantong Xuan Kai Steel Structure Engineering v Wuxi Jiayu Accounting Firm, et al (2022), where the bankruptcy administrator, acting as the litigation representative, filed a lawsuit against the original shareholders, capital verification agencies and capital lending institutions for capital withdrawal disputes.

In the event of accelerated capital contributions, former shareholders must jointly cover contribution deficiencies for transferred shares. Following the acceptance of a bankruptcy case, the accelerated capital contributions of company shareholders significantly impact former shareholders who have exited the company.

Article 88 of the new Company Law stipulates that both new and former shareholders are jointly responsible for the accelerated capital contributions corresponding to the transferred shares. This extends the liability for accelerated capital contributions to former shareholders.

Joint liability limitations for initial shareholders. Article 50 of the new Company Law states that all initial shareholders are jointly liable for the paid-in capital at the time of the company’s establishment, but are not jointly liable for the subscribed capital. This principle was upheld by the court in Shanghai Jucheng Kuandu Electronic Technology v Kuandu Network Technology (2024).

Dividend-related liabilities

Article 211 of the new Company Law strengthens the liability provisions for illegal dividends based on the old Company Law. Unlike the transparency required for company capital contributions, shareholder profit distributions are more concealed, and there is no mandatory public disclosure requirement for profit distributions in limited liability companies.

Consequently, illegal dividends often come to light only after a company enters bankruptcy proceedings, when administrators take over bank accounts and financial records. In practice, illegal dividends are common, such as when a company distributes profits without covering past losses, substantially harming creditors’ interests. During bankruptcy proceedings, once such situations are exposed, administrators will recover the distributed profits from shareholders.

Additionally, article 77 of the Enterprise Bankruptcy Law stipulates that, during the reorganisation period, shareholders of a bankrupt enterprise cannot request the distribution of investment returns. This special provision in bankruptcy reorganisation procedures reflects the legislative priority to protect creditors’ interests.

Liquidation responsibilities

The revisions to the new Company Law significantly impact the parties responsible for company liquidation. For the first time, the new Company Law explicitly introduces the concept of a “liquidation obligor” and clearly defines directors as such.

According to article 7(3) of the Enterprise Bankruptcy Law, if a company has not been liquidated, or has not completed liquidation but meets the conditions for bankruptcy acceptance, those legally responsible for liquidation must apply to the people’s court for bankruptcy liquidation.

Before the implementation of the new Company Law, the scope of liquidation obligors was ambiguous in practice. Shareholders, directors and even actual operators in some cases could be considered liquidation obligors, meeting the criteria for applying for enterprise bankruptcy.

With the new Company Law, the definition of liquidation obligors is clearer and more precise. However, since many companies designate shareholders as liquidation obligors in their articles of association, the dual role of shareholders and directors as liquidation obligors will persist during the transition and adjustment period between the old and new Company Law.

As liquidation obligors, shareholders and directors are obligated to co-operate with administrators in the liquidation process once a company’s bankruptcy application is accepted. Additionally, investors must participate in the voting process during bankruptcy reorganisation. This requirement is based on the consideration that liquidation obligors have a better understanding of the company’s actual operations, aiming to facilitate the smooth progress of bankruptcy proceedings and protect creditors’ interests.

The new Company Law underscores that shareholders’ responsibilities span the entire lifecycle of a company. From establishment to liquidation and even bankruptcy, shareholders must be aware of their responsibility boundaries to avoid early mistakes affecting subsequent decisions.

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Kong Yiding is a senior partner at Wintell & Co. She can be contacted by phone at +86 21 6854 4599 and by email at [email protected]

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