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Supplemental liability of shareholders for improper capital reduction of the company
Release date:
2022-07-22

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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

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.

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 liabilitiesthe 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.

 

Legal liability of shareholders for improper capital reduction of 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.