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Article 34 of the new Company Law stipulates: ¡°Changes in company registration matters must be legally registered. Unregistered or unamended changes cannot be used against bona fide counterparties.¡± This clause is derived from article 32(2) of the previous Company Law, which stated: ¡°Unregistered or unamended registration matters cannot be used against third parties.¡±

The new Company Law modifies the term ¡°third parties¡± to ¡°bona fide counterparties¡±. This change raises the question: Does the scope of bona fide counterparties include ordinary external creditors? And specifically, in practical cases, can general creditors of nominal shareholders request the execution of the nominal shareholders¡¯ assets as bona fide counterparties?

The core conflict lies in the priority of protecting the interests of creditors versus those of actual shareholders.

Different perspectives

Supporters of including general creditors of nominal shareholders as bona fide counterparties argue:

1. ¡°Bona fide third parties¡± and ¡°bona fide counterparties¡± are synonymous. Bona fide counterparties are not limited to contractual parties under commercial law but include parties involved under enforcement law;
2. Under the commercial appearance doctrine, external creditors cannot know registration errors. So, based on their reliance on the presumed correctness of commercial registrations, these creditors have the right to initiate enforcement actions; and
3. From a subjective fault perspective, external creditors have no fault regarding registration errors, while actual shareholders have the obligation to register equity but fail to do so, thus having fault. Therefore, the faultless external creditors¡¯ interests should be protected over those of the at-fault actual shareholders.

Arguments against recognising general creditors of nominal shareholders as bona fide counterparties typically include:

1. According to the legislative interpretation of the General Principles of Civil Law, ¡°counterparties¡± and ¡°third parties¡± have different meanings in civil law. ¡°Counterparties¡± pertains to contractual relativity (A-B contract relationship), usually referring to the other party in a contract (B), whereas ¡°third parties¡± denotes parties (C) that hold a legal relationship with one of the contracting parties (A or B) outside of the A-B contract. The amendment specifically changed the wording to ¡°counterparties¡±, indicating it refers only to the other contracting party (B);
2. According to article 25 of the Provisions of the Supreme People¡¯s Court on Several Issues Concerning Application of the Company Law of the People¡¯s Republic of China (III), the bona fide acquisition of shares is strictly applicable to third parties engaged in equity transactions with nominal shareholders. Therefore, the commercial appearance doctrine does not apply to third parties outside these transactional relationships; and
3. In cases where both the property rights of actual contributors and external creditors are considered ordinary claims, no legal provision grants external creditors¡¯ property rights legal precedence over those of actual contributors when both are present.

Current legal basis

Currently, there is no consensus on this issue, either in academic circles or in practice. However, considering the process and legal basis of this amendment, it should be believed that article 34 of the Company Law, which refers to ¡°bona fide counterparties¡±, does not include the general creditors of nominal shareholders.

On one hand, if ¡°third parties¡± and ¡°bona fide counterparties¡± are synonymous, there would be no need to amend this terminology. The purpose of the amendment is to more accurately and reasonably define the scope of targets that can be contested under the registration influenced by the commercial appearance doctrine.

On the other hand, within the framework of Chinese law, there is a clear interpretation concerning the bona fide acquisition of equity. The Company Law Judicial Interpretation III explicitly states in article 25 that nominal shareholders may dispose of equity, and article 28 outlines that when original shareholders dispose of shares by transfer or pledge without updating the registration, and if these shares are subsequently sold multiple times, if the actual investor claims that such a disposition by an unauthorised party is invalid, the court must refer to article 311 of the Civil Code, which addresses bona fide acquisitions to determine the validity of the said disposition.

So, a transferee can acquire equity and legally contest the actual contributor under certain conditions:

1. Bona fide;
2. Acquisition at a reasonable price; and
3. Proper registration of the transaction.

However, when external creditors apply to execute the shares of nominal shareholders during the enforcement stage, they ultimately may acquire the shares or the proceeds from their auction.

Yet, such acquisitions do not meet the criteria for bona fide acquisitions. Firstly, external creditors do not complete the share transfer registration; and secondly, they do not provide any consideration for acquiring these shares.

If external creditors, who are not involved in equity transactions, are allowed to enforce against nominal shareholders without meeting the bona fide requirements, there is no justification to uniquely restrict transferees in equity transactions from contesting actual contributors unless they meet the same requirements.

This is because both parties in equity and non-equity transactions are considered to be acting in good faith and unaware, and their interests should be equally protected.

In conclusion, article 34 of the new Company Law should not include ordinary external creditors as bona fide counterparties. It refers only to bona fide counterparties in equity transaction contracts, who must meet the conditions for bona fide acquisition of equity.

Pan Junhui is a partner and Jian Yiqian is an associate at Grandway Law Offices