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The new Company Law has revised the registered capital system to a limited duration paid-in capital system, reflecting a legislative focus on maintaining sufficient company capital and protecting creditor interests. To address issues arising from equity transfers under the former subscription system that resulted in unfulfilled capital contribution obligations, article 88 stipulates that if the transferee fails to make full and timely capital contributions, the transferor shall bear supplementary contribution liability.

However, the implementation of this provision has sparked extensive debate in both academic and practical circles regarding its retroactivity. This article reviews the discussions and conclusions of the National People¡¯s Congress and the Supreme People¡¯s Court on this issue. It also analyses the mainstream judicial approaches and outcomes in handling historical shareholder capital contribution liabilities, based on four recently published guiding cases by the Supreme People¡¯s Court.

Retroactivity of article 88

Article 88(1) of the new Company Law states: ¡°Where a shareholder transfers equity with subscribed but unpaid capital contributions that have not yet reached the contribution deadline, the transferee shall assume the obligation to make such contributions. If the transferee fails to make full and timely contributions, the transferor shall bear supplementary liability for the unpaid contributions.¡±

According to article 4(1) of the Several Provisions of the Supreme People¡¯s Court on the Retroactivity in the Application of the Company Law of the People¡¯s Republic of China: ¡°For civil disputes arising from legal facts that occurred before the implementation of the Company Law, where the applicable laws or judicial interpretations at the time did not provide regulations but the Company Law does, the following situations shall apply the provisions of the Company Law: (1) Where a shareholder transfers equity with unpaid capital contributions that have not yet reached the contribution deadline, and the transferee fails to make full and timely contributions, the determination of the capital contribution liabilities of the transferor and transferee shall apply article 88(1) of the Company Law.¡± This provision explicitly grants retroactivity to article 88(1) of the new Company Law.

Following the implementation of the new Company Law, courts across the country have widely accepted cases seeking to hold former shareholders liable for supplementary capital contributions. Under article 88(1), numerous former shareholders who had transferred their equity were brought into litigation and held liable, without distinguishing whether the equity transfer was made with the intent to evade capital contribution obligations.

This judicial practice triggered widespread discussion about how to balance the interests of historical shareholders and creditors in such cases. In response, the Legislative Affairs Commission of the Standing Committee of the National People¡¯s Congress publicly issued a review opinion, stating that article 88(1) of the new Company Law does not meet the conditions for retroactive application.

On 24 December 2024, the Supreme People¡¯s Court issued an official reply, clarifying that article 88(1) of the Company Law applies only to equity transfers with unpaid capital contributions occurring after 1 July 2024.

For disputes over capital contribution liabilities arising from equity transfers conducted before 1 July 2024, where the contribution deadline has not yet expired, courts are instructed to handle such cases fairly and justly in accordance with the principles of the previous Company Law and other relevant laws. This means that equity transfers conducted before the implementation of the new Company Law are governed by the old law, not article 88(1).

Clarification under the old law

On 27 December 2024, four new cases involving historical shareholders¡¯ capital contribution liabilities were added to the court case database. These cases provide clearer judicial reasoning on such issues under the old law, presenting both affirmative and negative perspectives. They establish that historical shareholders who maliciously evade capital contribution obligations through equity transfers are legally required to bear supplementary contribution liabilities.

In the disputes over objections to enforcement involving Han and three others against Yao and his logistics company (2021), as well as Lu and Cao against Shen, Pan and Yang (2021), the court clarified that shareholders whose deadlines for capital contribution have not yet expired must bear capital contribution liability if, when the company is unable to repay its debts, they transfer equity under clearly abnormal conditions ¨C such as at zero or unreasonably low consideration, or without transferring the company¡¯s seals, certificates or related assets ¨C to individuals evidently incapable of fulfilling the capital contribution obligations.

Conversely, in the disputes over shareholder liability for harming creditors¡¯ interests involving Tang and the Jiangs against Chen and a bedding company (2024), and a leasing company against Zhang and others (2023), the court held that if the company was operating normally, remained solvent, and the transferee had the capacity to fulfil capital contributions, the equity transfer did not harm creditors¡¯ interests. In such cases, the transferor cannot be deemed to have maliciously evaded capital contribution obligations and is not liable for capital contributions.

These rulings demonstrate that if a company is insolvent and the equity transfer is clearly unreasonable, with the transferor acting with intent to evade capital contribution obligations, the transferor must bear supplementary contribution liabilities. In such disputes, the commercial reasonableness of equity transfer ¨C including factors such as the transferee, timing, price, purpose, method and the extent of imbalance caused to the parties¡¯ interests ¨C will be the focus of evidence and arguments.

Yi Xiangming is a partner and Zhou Yueqin is an associate at Zhong Lun Law Firm