Shareholders Not Reducing Capital Held Liable for Debts Due to Illegal Capital Reduction Procedures!

Case Background

Shanghai Company A, a manufacturing enterprise, had two shareholders: Company B and Company C. The registered capital was RMB 80 million, with Company B subscribing to RMB 60 million and Company C subscribing to RMB 20 million. Both shareholders had initially paid in RMB 10 million each.

In March 2021, Company A’s shareholders, Company B and Company C, resolved to reduce the registered capital from RMB 80 million to RMB 30 million. Company B reduced its capital contribution by RMB 50 million, while Company C did not reduce its contribution.

Procedural Violations

After signing the capital reduction resolution, Company A published a reduction announcement in a newspaper but failed to directly notify creditors in writing. The market supervision authority subsequently approved the capital reduction and updated the registration.

Litigation & Court Rulings

In May 2021, Company D sued Company A and its shareholders (B and C) over disputes arising from a long-term procurement contract signed in November 2019, demanding joint liability for payment of RMB 35 million in unpaid fees.

First-instance Judgment (December 2021):

Company A was ordered to pay Company D RMB 35 million. Shareholder B was held jointly liable for illegally reducing its capital contribution, while Shareholder C was exempted.

Second-instance Judgment:

The appellate court overturned the ruling and added Shareholder C (which did not reduce its capital) to bear joint liability.

Key Legal Analysis

Strict Compliance with Capital Reduction Procedures:

Companies must notify creditors in writing and publish a newspaper announcement. These are dual mandatory steps, not alternatives.

Failure to directly notify creditors invalidates the reduction process, exposing shareholders to liability.

Liability of Non-Reducing Shareholders:

Even shareholders who do not reduce their capital (e.g., Company C) may be held liable if they knew or should have known about procedural violations but failed to rectify them.

Courts may impose joint liability if illegal capital reduction leads to post-reduction insolvency for pre-existing debts.

Dongjin Remind:

Capital reduction procedures must strictly follow the Company Law to avoid shareholder liability risks.

All shareholders, regardless of whether they reduce capital, bear a duty to ensure compliance. Ignoring irregularities may result in unforeseen legal exposure.

Need Assistance?

For expert guidance on capital reduction, debt resolution, or corporate compliance, Please contact Dongjin anytime.

Mike Chang

Partner

mikechang@shanghaiinvest.com