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l  Our Firm’s Latest Activites

Our Case AnalysisSupplemental liability of shareholders for improper capital reduction of the company

l  Latest Highlight

Eight authorities including the Ministry of Housing and Urban-Rural Development ('MOHURD') and the National Development and Reform Commission ('NDRC') jointly released on June 21, 2022 the Circular on Accelerating the Work for Reduction or Exemption of Rent for Market Entities on a Time-limited Basis.

l  New Law Update

Decision of the Standing Committee of the National People's Congress on Amending the Anti-monopoly Law of the People's Republic of China Further clarify the rules of application of the anti-monopoly-related system in the platform economy Analysis of Questions of General Concern on the “Interpretation by the Supreme People's Court regarding the Application of the Anti-Unfair Competition Law of the People's Republic of China”

【Our Firm’s Activities】

Our Case Analysis Supplemental liability of shareholders for

 improper capital reduction of the company

Case Background

The Veritas team previously represented a case in a dispute over a sales contract in which the defendant is a corporation and has no property to enforce. However, it was discovered that the defendant had violated legal procedures to reduce its capital and endanger the interests of the client during the period of the transaction with the client. Therefore, we added the company's shareholders as defendants and undertake supplementary liability from the company's shareholders to the extent of the capital reduction. The reasons are as follows:

I．A company is an enterprise legal person which owns independent legal person property

According to the relevant provisions Company Law of the People's Republic of China (Amended in 2018), a company is an enterprise legal person which owns independent legal person property and enjoys legal person property rights. The liability of a company shall be limited to its entire assets. The liability of a shareholder of a limited liability company shall be limited to the amount of its capital contribution. If the shareholders of the company have effectively fulfilled their capital contribution obligations, they are not liable for the debts of the company. However, if the company improperly reduces its capital, the shareholders of the company shall be liable for the company's debts to the extent of their reduction.

II. Reduction of capital by a company in violation of legal procedures constitutes an improper reduction of capital

The Company law is explicit in the limited liability of the shareholders of the company, but also explicit that the legitimate rights and interests of the company's creditors should be protected in accordance with the law. The company's registered capital is not only the basis for the company's shareholders to assume limited liability, but also an important basis for the company's counterparties to judge the company's ability to meet its property liabilities, the company has an obligation to its creditors to pay off or provide security at the request of the creditors in the event of a capital reduction. Improper reduction of registered capital will directly affect the company's external solvency and endanger the interests of creditors. The legal procedures for capital reduction are explicit defined in Article 177 of the Company Law. A reduction of capital by a company in violation of legal procedures constitutes an improper reduction of capital.

China's laws do not explicitly stipulate the legal consequences of the company's capital reduction in violation of legal procedures, nor do they explicitly stipulate what kind of legal responsibility the relevant personnel should bear. However, the company's capital reduction is the result of the resolution of the shareholders' meeting, the beneficiary of the capital reduction is the company's shareholders, and the situation and shareholders' abstraction of capital for creditors have the same essence. Therefore, it should be considered that the company's reduction of capital in violation of legal procedures constitutes an improper reduction of capital, the essence of which is the abstraction of capital. The relevant shareholders and other relevant personnel shall bear the same legal responsibility as the abstraction of capital.

III. Legal liability of shareholders for reduction of capital by a company

As mentioned above, the essence of the company's capital reduction in violation of legal procedures is the abstraction of capital. Chinese law has clear provisions on the liability of shareholders for capital evasion, in addition to the legal responsibility of the company or other shareholders for the return of capital interest, the company's creditors should also be liable for supplementary compensation for the part of the company's debt that cannot be satisfied within the scope of the evaded capital interest.

Therefore, a company must follow the statutory procedures when reducing its capital, otherwise it may constitute an improper reduction of capital and the shareholders of the company are liable for supplementary liability for the debts of the company to the extent of the reduction.

【Latest Highlight】

China Further Supports Time-limited Reduction and Exemption of 

Rent on Market Entities

Eight authorities including the Ministry of Housing and Urban-Rural Development ('MOHURD') and the National Development and Reform Commission ('NDRC') jointly released on June 21, 2022 the Circular on Accelerating the Work for Reduction or Exemption of Rent for Market Entities a Time-limited Basis (“Notice”).

In order to implement the requirements of Notice of the State Council on Promulgation of a Package of Policies and Measures for Firmly Stabilizing the Economy (Guo Fa [2022] No. 12), to promote the work for reduction or exemption of rent for market entities on a time-limited basis, to help micro and small businesses and self-employed individuals in the service sector to alleviate the pressure of housing rent, the relevant state ministries and commissions attach great importance to the work of rent reduction, reduction or exemption of rent for market entities on a time-limited basis, which is a major decision of the State Council, is an important work initiative to stabilize the economy, and is of great significance to protect market entities, employment and people's livelihood. Notice requires all places to work in accordance with the established rent reduction mechanism, combined with their own reality, the coordination of various types of funds, to come up with pragmatic and practical measures to promote the reduction of housing rent for market entities, to ensure that the policies and measures to take effect on the ground.

It urged to accelerate the implementation of the rent reduction and exemption policies and measures. The main points are as follows:

For micro and small businesses and self-employed individuals in the service sector in a county-level administrative area being identified as high-risk area that rent state-owned housing, the rent can be reduced or waived by six months in 2022, and the rent in other areas can be reduced or waived by three months. For lessors who are willing to reduce or exempt rent, the property tax and urban land use tax payable in the year would be reduced or waived by tax authorities according to the applicable local rules, and pledge loans with preferential interest rate sand other support would be given by state-owned banks. (Resource: Ministry of Housing and Urban-Rural Development of the People’s Republic of China)

【New Law Update】

Decision of the Standing Committee of the National People's Congress on Amending the Anti-monopoly Law of the People's Republic of China 

Further clarify the rules of application of the anti-monopoly-related system in the platform economy

In October 2021, the thirty-first meeting of the Standing Committee of the National People's Congress conducted the initial consideration of the draft amendments to the Anti-Monopoly Law. On June 24, 2022, the 35th meeting of the Standing Committee of the 13th National People's Congress voted on the decision to amend the Anti-Monopoly Law, and the amendment to the Anti-Monopoly Law will come into effect on August 1, 2022. China’s current anti-monopoly law that has been in effect since August 1, 2018.

Yang Heqing, the spokesman of the Legal Working Committee of the Standing Committee of the National People's Congress, pointed out that the draft amendment to the anti-monopoly law implements the decision of the Party Central Committee on strengthening anti-monopoly and preventing disorderly expansion of capital, and further clarifies the rules of application of the anti-monopoly-related system in the platform economy in accordance with the mode and characteristics of competition in the platform economy. There are both general provisions, such as the provision in the General Provisions that operators shall not use data and algorithms, technology, capital advantages, and platform rules to engage in monopolistic conduct under this Law to exclude or restrict competition, as well as refined rules for types of monopolistic conduct, such as special provisions in the chapter on abuse of dominant market position. The second review draft submitted for this review is proposed to make changes in five areas.

First, according to the latest practice of anti-monopoly enforcement system reform, it is clear that 'the State Council anti-monopoly enforcement agency' is the law enforcement department of this law.

Second, it is to further clarify the rules of application of the anti-monopoly-related system in the platform economy.

Third, is to improve the monopoly agreement 'safe harbor' rules.

Fourth, it is the investigation and processing procedures to improve the concentration of operators who do not meet the declaration criteria.

Fifth, is the review of the concentration of operators to put forward specific requirements.

The second draft of the draft amendment to the Anti-monopoly Law summarizes the practice of anti-monopoly enforcement, draws on international experience, and makes further improvements to the rules of the anti-monopoly-related system. In respect of monopoly agreements.

First, the 'safe harbor' rule has been added, which excludes horizontal monopoly agreements between competitors from monopoly agreements entered into between operators and counterparties. If the operator's market share is lower than the standards and conditions stipulated by law, the law does not prohibit it, which is the 'safe harbor' rule for monopoly agreements. The 'safe harbor' rule can provide clear guidance to enterprises on competition compliance and, while defining the boundaries of compliance, can maximize the development of cooperation and synergistic operation of enterprises and further stimulate the market dynamics of SMEs.

Second, it is added that operators shall not organize other operators to enter into monopoly agreements or provide substantial assistance to other operators to enter into monopoly agreements, that is, in practice, some operators do not participate directly and do not enter into monopoly agreements themselves, but organize others to formulate monopoly agreements to hinder fair competition.

Third, the rules for the determination of vertical monopoly agreements have been improved. The law also does not prohibit vertical monopoly agreements entered into by an operator and a counterparty to a transaction if the operator can prove that they do not have the effect of excluding or restricting competition.

As for the concentration of operators, Yang Heqing introduced that the investigation and handling procedures for the concentration of operators that do not meet the declaration standard have been increased. For the concentration of operators that do not meet the declaration standard but have evidence that they have or may have the effect of excluding or restricting competition, the anti-monopoly enforcement agency of the State Council may require the operators to declare the concentration. At the same time, the circumstances under which the period for review of concentration of operators is suspended and the notification requirements are added to regulate the review procedure of concentration of operators.

'In line with the decision of the Party Central Committee to accelerate the construction of a large nationwide unified market, the draft amendment requires the anti-monopoly enforcement agency of the State Council to improve the classification and grading review system of operator concentration, strengthen the review of operator concentration in important areas involving the people's livelihood of the country in accordance with the law, and improve the quality and efficiency of the review.' Yang Heqing said. (Resource: www.npc.gov.cn) 

About Veritas

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