Know a Company and Trade Safely

On 29 December 2023, the National People's Congress of China voted to pass the newly revised "Company Law of the People's Republic of China" (hereinafter referred to as the "Company Law"). The revised "Company Law" will come into effect on 1 July 2024.

The soon-to-be-effective "Company Law" has improved the subscribed registration system for limited liability companies, specifying that the shareholders must fully pay the subscribed register capital within five years from the company's establishment.

The existing "Company Law," since its promulgation in 1993, underwent significant revisions related to the company capital system in 2005 and 2013.

In 2013, the "Company Law" underwent a significant revision regarding the company capital system, eliminating requirements for limited liability companies such as the minimum registered capital amount, actual payment requirements, subscription deadlines, non-monetary contribution ratios, and mandatory capital verification procedures. It firmly established the fully subscribed capital system, allowing shareholders to independently agree on the registered capital amount and payment deadline, granting benefits regarding the contribution period to shareholders. 

Subsequent judicial practices and regulatory frameworks generally maintained the trend of loosening company capital controls introduced by the 2013 "Company Law." The number of registered companies increased from 10.33 million in 2013 to 38 million.

However, No requirements on the deadline for shareholders to pay their subscribed registered capital led to inflated registered capital and many shell companies.

For instance, as we posted before in this article, according to some domestic media in China, a private company falsified its registered shareholder to present itself as a subsidiary of a giant state-owned group. The company's registered capital was RMB 240 million, but zero was contributed.

In other cases, for example, a listed company engaged in financial lending discovered a large amount of loans that could not be recovered. After investigation, it was found that these loans were disbursed to shell companies that had no actual operations. These shell companies had no physical operating address, and their registered capital ranged from RMB 100,000 to 1 million, yet the actual capital invested in the companies was zero.

The upcoming "Company Law" has already impacted companies that inflated registered capital. Media reports that since January 2024, there has been a noticeable increase in companies issuing announcements to reduce their registered capital.

We anticipate that the revised "Company Law" will help reduce the number of shell companies and promote integrity in business activities.

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