Introduction

Company capital is the fundamental guarantee for a company’s operation and provides a clear reflection of the rights and obligations between the company and its creditors, as well as between the company and its shareholders. It also serves as a credit guarantee for the company’s business operations. Therefore, company capital has a significant impact on a company’s operations, and correspondingly, the company capital system is a crucial part of company law theory.

In 2014, the Company Law deleted the provisions regarding the “proportion of initial capital contribution” and “statutory time limit for contribution” and amended them to a “subscription registration system.” To a certain extent, the subscription registration system lowered the threshold for establishing a limited liability company. Many enterprises started businesses with zero registered capital, leading to a surge in the market of newly established companies with high registered capital or increases in existing companies’ registered capital.

So, where do the risks of the subscription registration system lie? Could high registered capital pose hidden dangers for shareholders personally? This article will primarily analyze the scenarios of accelerated maturity of shareholder capital contributions and provide some recommendations for shareholders to avoid personal liability.

I

What is accelerated maturity of shareholder capital contributions?

Under the registered capital subscription registration system, shareholders enjoy the benefits of a term. The Company Law stipulates various obligations for shareholder capital contributions: “Article 3, paragraph 2: Shareholders of a limited liability company shall be liable to the company to the extent of their respective subscribed capital contributions. Article 26, paragraph 1: The registered capital of a limited liability company shall be the total amount of capital contributions subscribed by all shareholders registered with the company registration authority. Article 28, paragraph 1: A shareholder shall pay in full and on time the amount of capital contribution subscribed by such shareholder as specified in the company’s articles of association.” According to these provisions, shareholders shall bear limited liability within the scope of their subscribed capital contributions, and at the same time, shareholders shall make capital contributions in accordance with the subscription period stipulated in the articles of association, without the need for early payment.

However, in judicial practice, various situations arise where strictly adhering to the subscription period for shareholder capital contributions would seriously harm the interests of creditors and provide space for shareholders to evade debts. Therefore, under certain circumstances, shareholders’ capital contributions are no longer strictly made according to the subscription period stipulated in the articles of association but must be paid early, i.e., the deadline for paying the registered capital matures early. This is referred to as “accelerated maturity of shareholder capital contributions.”

II

Scenarios of Accelerated Maturity of Shareholder Capital Contributions

(A) Acceleration during the enforcement stage

Article 17 of the Provisions of the Supreme People’s Court on Several Issues concerning the Change and Addition of Parties in Civil Enforcement (2020 Amendment) states: “Where the assets of a for-profit legal person that is a judgment debtor are insufficient to satisfy the debts confirmed by an effective legal instrument, and the enforcing applicant applies to add as a judgment debtor a shareholder, contributor, or promoter who is liable for joint and several liability for such contribution under the Company Law, who has not made or has not fully made capital contributions, and to hold them liable within the scope of the unpaid capital contributions, the people’s court shall support such application.” According to this provision, under the circumstance of “assets being insufficient to satisfy the debts confirmed by an effective legal instrument,” shareholders who have not made or have not fully made capital contributions can be required to bear liability within the scope of their subscribed capital contributions.

Article 6 of the Notice of the Supreme People’s Court on Issuing the Summary of the National Conference on Civil and Commercial Trial Work (hereinafter referred to as the “Minutes of the National Conference on Civil and Commercial Trial”) stipulates: “Under the registered capital subscription system, shareholders lawfully enjoy the benefits of a term. Where a creditor claims that the company is unable to pay its due debts and requests a shareholder whose capital contribution term has not yet expired to bear supplementary compensation liability for the company’s debts that cannot be paid within the scope of the unpaid capital contribution, the people’s court shall not support such claim. However, the following circumstances are exceptions: (1) In cases where the company is the judgment debtor, the people’s court has exhausted enforcement measures and found no property available for enforcement, and the company already meets the grounds for bankruptcy but does not apply for bankruptcy; …”

In summary, shareholders’ capital contributions can be accelerated during the enforcement stage, subject to the condition of insolvency. In such cases, creditors may apply to add shareholders who have not made actual capital contributions as parties liable within the scope of their subscribed capital contributions.

In judicial practice, there are numerous cases holding that if the circumstances under Article 17 of the Provisions of the Supreme People’s Court on Several Issues concerning the Change and Addition of Parties in Civil Enforcement occur during the enforcement stage, shareholders who have not actually contributed capital may be added as parties liable. See, for example, the Shenzhen Longhua District People’s Court (2020) Yue 0309 Zhi Yi No. 301, Guangzhou Intermediate People’s Court of Guangdong Province (2021) Yue 01 Min Zhong No. 3642, and other judgments.

(B) Acceleration during the bankruptcy stage

Article 35 of the Enterprise Bankruptcy Law stipulates: “After the people’s court accepts a bankruptcy application, if the capital contributors of the debtor have not fully performed their capital contribution obligations, the administrator shall require such capital contributors to pay the capital contributions they have subscribed, without being limited by the term of contribution.”

Based on the above provision, it is clear that in bankruptcy proceedings, the accelerated maturity of shareholder capital contributions is explicitly recognized. According to Article 2 of the Enterprise Bankruptcy Law, an enterprise legal person that is unable to pay its due debts and whose assets are insufficient to cover all debts or that is clearly lacking in solvency falls under the circumstances of bankruptcy. Accordingly, when such circumstances arise, the bankruptcy proceedings can be used to compel the accelerated maturity of shareholders’ contribution obligations.

At the same time, during litigation, the court may also explain to the parties that if grounds for bankruptcy exist, they may consider initiating bankruptcy proceedings to assert the accelerated maturity of shareholder capital contributions. The Supreme People’s Court’s Several Specific Issues in Current Commercial Trial Work emphasizes: “Currently, special attention should be paid to the issue of creditors requesting shareholders to fulfill their capital contribution obligations early to repay debts. There are different views on this: One view holds that if the debtor company cannot pay its due debts and shareholders have unpaid capital contributions that are not yet due, accelerating the contribution obligation could resolve the debt repayment issue. Therefore, such acceleration should be permitted, and creditors can directly claim repayment from shareholders. Another view holds that if a company cannot pay a single creditor’s due debt, it is often also insolvent or clearly lacks solvency or is at risk of losing solvency. At this point, according to Article 2 of the Enterprise Bankruptcy Law, the company already meets the conditions for bankruptcy, so the interests of all creditors should be protected. Individual debt recovery lawsuits are not entirely consistent with the spirit of Articles 31 and 32 of the Enterprise Bankruptcy Law. Creditors should apply for the debtor’s bankruptcy, enter bankruptcy proceedings, and then accelerate the shareholders’ contribution obligations under Article 35 of the Enterprise Bankruptcy Law, ultimately protecting the interests of all creditors in a genuine sense.

Between the above two views, we tend to adopt the latter. Therefore, in similar lawsuits, the court should explain to the parties that if the debtor company cannot repay its debts through financing or voluntary early payment of contributions by its shareholders, creditors have the right to initiate bankruptcy proceedings.

In the case of Shenzhen Peiqi Import and Export Trading Co., Ltd. v. Yichang Nanhu Sub-branch of Hubei Bank Co., Ltd. and Huacheng Investment Management Co., Ltd. (Case No.: (2012) Min Shen Zi No. 386, Gazette Case), heard by the Supreme People’s Court, the court held that “registered capital is the property guarantee for a company’s civil liability to all creditors. Where a shareholder’s capital contribution is insufficient, if the company is declared to enter bankruptcy proceedings, according to Article 35 of the Enterprise Bankruptcy Law, which states ‘After the people’s court accepts a bankruptcy application, if the capital contributors of the debtor have not fully performed their capital contribution obligations, the administrator shall require such capital contributors to pay the capital contributions they have subscribed, without being limited by the term of contribution,’ Huacheng, as a shareholder, should first make up its capital contribution to Peiqi Company.”

(C) Acceleration upon dissolution

Article 22, paragraph 1 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 (II) stipulates: “Upon the dissolution of a company, the capital contributions that have not yet been paid by shareholders shall all be treated as liquidation assets. Unpaid capital contributions include those that are due and payable and those that are to be paid in installments under Article 26 and Article 80 of the Company Law but whose payment term has not yet expired. Paragraph 2: Where the company’s assets are insufficient to pay off its debts, and creditors claim that shareholders who have not paid their capital contributions, as well as other shareholders or promoters at the time of the company’s establishment, bear joint and several liability for the company’s debts within the scope of the unpaid capital contributions, the people’s court shall support such claim according to law.” According to this provision, company creditors may assert accelerated maturity upon the dissolution of the company.

In the Civil Judgment (2021) Yue 0111 Min Chu No. 404 of the Guangzhou Baiyun District People’s Court, the plaintiff sued two shareholders of the company as defendants because the shareholders failed to notify the plaintiff when dissolving the company. The two defendant shareholders were also members of the company’s liquidation committee. In this case, the court held the shareholders liable within the scope of their unpaid capital contributions. Furthermore, there are a large number of cases in judicial practice demonstrating that shareholders’ contribution obligations can be accelerated upon the dissolution of the company, such as (2020) Su 07 Min Zhong No. 2392, etc.

(D) Whether acceleration is possible during litigation

In judicial practice, many creditors assert the accelerated maturity of shareholder capital contributions based on Article 13 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 (III) (2020 Amendment). This provision clearly states: “Where a shareholder fails to perform or fully perform its capital contribution obligation, and the company or other shareholders request the shareholder to fully perform its capital contribution obligation to the company according to law, the people’s court shall support such request. Where a company creditor requests a shareholder who has failed to perform or fully perform its capital contribution obligation to bear supplementary compensation liability within the scope of the unpaid capital contribution and accrued interest for the part of the company’s debts that cannot be paid, the people’s court shall support such request; where a shareholder who has failed to perform or fully perform its capital contribution obligation has already borne the above liability, and other creditors make identical requests, the people’s court shall not support such requests. Where a shareholder fails to perform or fully perform its capital contribution obligation at the time of the company’s establishment, and the plaintiff initiating a lawsuit under paragraph 1 or 2 of this Article requests the promoters of the company to bear joint and several liability with the defendant shareholder, the people’s court shall support such request; after the promoters bear liability, they may seek recourse against the defendant shareholder. Where a shareholder fails to perform or fully perform its capital contribution obligation during a capital increase, and the plaintiff initiating a lawsuit under paragraph 1 or 2 of this Article requests directors or senior management personnel who have failed to fulfill the obligations under Article 147, paragraph 1 of the Company Law, thereby causing the capital contribution not to be paid in full, to bear corresponding liability, the people’s court shall support such request; after the directors or senior management personnel bear liability, they may seek recourse against the defendant shareholder.” Objectively, whether accelerated maturity can be asserted during litigation on the grounds that a shareholder has not completed its capital contribution is handled differently in judicial practice depending on the circumstances.

1. Circumstances where acceleration is not supported during litigation

(1) The Minutes of the National Conference on Civil and Commercial Trial generally does not support acceleration

Article 6 of the Minutes of the National Conference on Civil and Commercial Trial stipulates: “Under the registered capital subscription system, shareholders lawfully enjoy the benefits of a term. Where a creditor claims that the company is unable to pay its due debts and requests a shareholder whose capital contribution term has not yet expired to bear supplementary compensation liability for the company’s debts that cannot be paid within the scope of the unpaid capital contribution, the people’s court shall not support such claim. However, the following circumstances are exceptions: (1) In cases where the company is the judgment debtor, the people’s court has exhausted enforcement measures and found no property available for enforcement, and the company already meets the grounds for bankruptcy but does not apply for bankruptcy; (2) After the company’s debt arises, the company’s shareholders’ meeting (or general meeting) resolves or otherwise extends the shareholder’s capital contribution period.” According to this provision, the Minutes of the National Conference on Civil and Commercial Trial generally does not support the accelerated maturity of shareholder capital contributions, except in exceptional circumstances.

(2) Guiding opinions also do not support accelerated maturity of shareholder capital contributions

The Supreme People’s Court’s Several Specific Issues in Current Commercial Trial Work (December 24, 2015) also opined: “If a company cannot pay a single creditor’s due debt, it is often also insolvent or clearly lacks solvency or is at risk of losing solvency. At this point, according to Article 2 of the Enterprise Bankruptcy Law, the company already meets the conditions for bankruptcy, so the interests of all creditors should be protected… In similar lawsuits, the court should explain to the parties that if the debtor company cannot repay its debts through financing or voluntary early payment of contributions by its shareholders, creditors have the right to initiate bankruptcy proceedings.” According to this opinion, as early as 2015, the Supreme People’s Court believed that to protect the interests of all creditors, if creditors’ rights of action are expanded indiscriminately, it would not be conducive to protecting the vital interests of all creditors.

(3) Numerous cases have not supported accelerated maturity of shareholder capital contributions

In the civil judgment of the case Wen Xuan et al., Nine Persons v. Huang Jianming, Yueyang Guanglian Wealth Investment Management Co., Ltd. concerning a dispute over liability for damage to creditors’ interests of a company by shareholders (Case No.: (2018) Xiang 06 Min Zhong No. 752, Excellent Case), heard by the Yueyang Intermediate People’s Court of Hunan Province, the court did not support accelerated maturity of shareholder capital contributions. The court held: “Since the capital contribution obligations of the nine shareholders have not yet matured, it is not appropriate to characterize this as a situation of ‘failure to perform or fully perform capital contribution obligations’ under Article 13, paragraph 2 of the Judicial Interpretation of Company Law (III), and the circumstances for accelerated maturity of capital contributions are not satisfied. The reasons are as follows: 1. Although Huang Jianming had previously filed a lawsuit on the underlying creditor-debt relationship against Guanglian Wealth Company and entered enforcement proceedings, and his claim against Guanglian Wealth Company has not been realized to date, it can be determined that Guanglian Wealth Company’s operations are in difficulty. However, since the enforcement proceedings have not concluded, and the company has not undergone liquidation or bankruptcy, there is insufficient evidence to prove that the company is ‘unable to pay its debts’ or ‘has lost solvency.’ Moreover, the determination of such facts should be resolved through enforcement or bankruptcy liquidation, not during the litigation process. 2. The amount and term of the shareholders’ subscribed capital contributions are clearly recorded in the company’s articles of association. As a public document, creditors should be aware of this fact and should anticipate the risk in the course of transactions. Therefore, justifying direct accelerated maturity based on protecting creditors’ expected interests lacks sufficient theoretical basis. 3. The amount of unpaid capital contributions by shareholders is limited. Allowing individual creditors to directly claim against shareholders through litigation under ordinary circumstances would inevitably cause unfairness to other creditors and affect the company’s independent normal operations. 4. Huang Jianmin failed to prove the existence of other special circumstances requiring accelerated maturity of shareholders’ capital contribution obligations. Therefore, seeking to accelerate the maturity of shareholders’ contribution obligations through litigation by breaking through the subscription system and holding non-contributing shareholders liable for supplementary compensation lacks sufficient grounds and legal basis.” This is consistent with the majority of previous analyses. Additionally, there are a large number of cases that did not support accelerated maturity of shareholder capital contributions, such as (2021) Su 13 Min Zhong No. 601, etc.

2. Circumstances where acceleration is supported during litigation

(1) Already meeting the grounds for bankruptcy but not applying for bankruptcy

Article 6 of the Minutes of the National Conference on Civil and Commercial Trial specifies two situations in which accelerated maturity can be claimed: (1) In cases where the company is the judgment debtor, the people’s court has exhausted enforcement measures and found no property available for enforcement, and the company already meets the grounds for bankruptcy but does not apply for bankruptcy; (2) After the company’s debt arises, the company’s shareholders’ meeting (or general meeting) resolves or otherwise extends the shareholder’s capital contribution period.

In the judgment (2020) Gan 10 Min Zhong No. 1352, the court held: “In this case, although the capital contribution subscription period of the appellant and the three original defendants is March 14, 2065, which has not yet expired, Company G has multiple cases as a judgment debtor in the L People’s Court. The L People’s Court has exhausted enforcement measures but found no property available for enforcement, and the company already meets the grounds for bankruptcy. Under such circumstances, the shareholders’ capital contributions meet the constitutive requirements for accelerated maturity. At this time, creditors may require shareholders whose capital contribution term has not expired to bear supplementary compensation liability within the scope of their unpaid capital contributions for the company’s debts that cannot be paid.” Accordingly, during litigation, we can search for cases of the defendant company or otherwise investigate whether the company has grounds for bankruptcy, thereby achieving the purpose of claiming accelerated maturity of shareholder capital contributions.

(2) Extending the capital contribution period after the debt arises

In the civil judgment of the Guangzhou Intermediate People’s Court of Guangdong Province (2020) Yue 01 Min Zhong No. 13832 (September 15, 2020), the court held: “Since the capital contribution debt of Shi Yi Chong Company had not actually arisen, the adjustments made by Shi Yi Chong Company regarding the information on the capital contribution subscription period of shareholders in the 2016 and 2017 annual reports are insufficient to establish that the purpose was to extend the shareholder’s capital contribution period for an improper purpose, to evade the shareholder’s liability for making up capital contributions when the company cannot perform its debts. Ai Liang Company, relying solely on the above annual reports, requested to confirm the accelerated maturity of the capital contribution period of Shi Yi Chong Company’s shareholders and accordingly claim that the shareholder Zeng Wei, whose capital contribution period had not expired, should bear supplementary compensation liability within the scope of 5.3 million yuan for Shi Yi Chong Company’s external capital contribution obligations. This lacks sufficient factual basis and legal grounds, and this court does not support it.” Accordingly, acceleration liability in this situation requires two elements: first, the timing—it must occur after the debt arises; second, improper conduct—i.e., extending the capital contribution period.

(3) Priority claims can assert accelerated maturity

In the case of Yao Jincheng v. Hongda (Shanghai) Investment Management Co., Ltd., Zhang Ge, et al. concerning a dispute over corporate resolutions (October 11, 2019, Gazette Case) heard by the Shanghai Second Intermediate People’s Court, the court held: “Regarding the third focus of dispute. Ordinary claims have equality, but in judicial practice, priority company claims can under certain conditions require shareholders to contribute capital early or accelerate maturity. For example, labor claims arising from the company’s arrears of wages to employees, where the company has no assets available for enforcement, can require shareholders to contribute capital early or accelerate maturity to assume corresponding legal liability.” Accordingly, priority claims can assert accelerated maturity.

III

How to Avoid Shareholder Liability

(A) Appropriately determine registered capital

In practice, many enterprises set a high registered capital to demonstrate the company’s strength, but this indeed carries certain risks. First, when the company is poorly managed and insolvent, creditors have the right to require shareholders to bear the liability of accelerated maturity of capital contributions, thereby harming shareholders’ personal assets. Second, many creditors often sue shareholders who have not made actual capital contributions as co-defendants when filing lawsuits and simultaneously freeze shareholders’ assets through property preservation measures. Since courts do not conduct substantive review at the time of filing, this provides a litigation strategy for many creditors to safeguard their rights by freezing shareholders’ personal assets, thereby creating certain risks for shareholders.

Therefore, we recommend that when establishing a company, there is no need to register excessively high registered capital; it should be designed according to actual needs. If the company has already set a high registered capital, and before the company incurs debts, consideration may be given to appropriately reducing shareholders’ personal liability through capital reduction.

(B) Complete actual capital contributions as soon as possible

During the operation of a company, significant expenses will inevitably be incurred. In the process of company operation, shareholders’ investment funds are often already injected into the company. It is recommended that limited liability companies complete the actual payment of registered capital as soon as possible to minimize shareholders’ personal risk to the greatest extent.

(C) Independence of shareholders’ and company’s assets

In addition to the circumstances of accelerated maturity of shareholder capital contributions analyzed above, if creditors have evidence that shareholders’ assets and company assets are not independent, this may also lead to shareholders being jointly and severally liable. In practice, some company owners use personal accounts to transact with counterparties, resulting in the counterparty obtaining the shareholder’s account information and forming preliminary evidence that the shareholder’s assets are not independent from the company’s assets, thereby creating significant risks for the shareholder. Therefore, we recommend that during transactions, efforts should be made to conduct transactions through corporate accounts, and shareholders’ personal assets should be kept independent from company assets, thereby reducing the risk of shareholders being jointly and severally liable.