Failure to Comply with Legal Capital Reduction Procedures, Shareholders Who Did Not Reduce Capital Are Also Held Jointly Liable for Debts by the Court!

Shanghai Company A is a manufacturing enterprise with shareholders Company B and Company C, and a registered capital of CNY80 million, of which Company B subscribed to CNY 60 million, and Company C subscribed to CNY 20 million. Both Company B and Company C have actually paid in registered capital of CNY 10 million each. In March 2021, the shareholders of Company A, Company B and Company C, decided to reduce the registered capital of Company A from CNY 80 million to CNY 30 million, with shareholder Company B reducing its contribution by CNY 50 million, and Company C not reducing its contribution.

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

In May 2021, Company D had a dispute with Company A over the performance of an order in a long-term purchase contract signed in November 2019. Company D sued Company A and both shareholders, Company B and Company C, in court, demanding joint liability from all three companies. In December 2021, the first-instance court ruled that Company A should pay Company D more than CNY 35 million for the payment of goods and other expenses, and shareholder Company B was held jointly liable for illegally reducing its capital contribution, but Company C was not held jointly liable. Company A appealed the first-instance judgment, and the second-instance court overturned the decision, holding the shareholder Company C, who did not reduce its contribution, jointly liable as well.

Dongjin Reminder:

When a company undergoes capital reduction, 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, not optional; at the same time, for shareholders who have not reduced their contributions, even though they have not reduced their own capital, if they knowingly or should have known that there are violations in the company's capital reduction procedures and have not urged the company to correct them, resulting in the company's debts formed before the capital reduction being unable to be paid off after the capital reduction, the court will require all relevant shareholders to bear joint liability.

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

Mike Chang

Partner

mikechang@shanghaiinvest.com