Shareholders Evade Debt by Illegally Reducing Capital, Court Rules Company and Shareholders Jointly Liable for Debts!

Shanghai Company A is a trading company with a registered capital of CNY 10 million, of which only CNY 500,000 has been actually paid in. In January 2020, the shareholders of Company A decided to reduce the registered capital from CNY 10 million to CNY 500,000.

Company A published a capital reduction announcement in a newspaper but did not directly notify the company's creditors. Subsequently, the market supervision and administration department handled the change registration of the capital reduction based on the company's application.

In March 2020, Company B had a dispute with Company A over the performance of an order in a long-term purchase contract signed in December 2018. Company B sued Company A in court. In October 2021, the first-instance court ruled that Company A should pay Company B more than CNY 800,000 for trade payments and other expenses, and the shareholders of Company A were held jointly liable due to the illegal capital reduction. Company A appealed against the first-instance judgment, but the second-instance court dismissed the appeal and upheld the original judgment.

Dongjin Reminder:

When a company reduces its capital, it must strictly follow the procedural requirements for capital reduction and notify creditors in writing; the direct notification and newspaper announcement in the capital reduction process are dual procedures for capital reduction, both of which are indispensable, meaning that direct notification of creditors and newspaper announcements must be carried out simultaneously, not selectively; the creditors that a company should notify when reducing capital are not limited to those with clear claims, as long as the basis for the creditor-debtor relationship with the creditors already exists before the company reduces its capital, and the potential claims of the creditors have the possibility of becoming actual claims, the company should notify such creditors when reducing its capital; when a company applies to the market supervision and administration department for the change registration procedures of capital reduction, all shareholders should abide by the principle of honesty and credit and declare truthfully, without concealing or submitting false debt situations to handle the change registration procedures of capital reduction. The practice of companies and their shareholders hoping to evade debts through illegal capital reduction will be negated by the court.

If enterprises have any questions, they are welcome to consult Dongjin at any time.

Mike Chang

Partner

mikechang@shanghaiinvest.com