Adapting to the New Company Law, Understanding in one article (2/3)
Our previous article shared the change to company governance structures. In this article, we will discuss the change to the provision on company capital.
CHANGES TO PROVISIONS ON COMPANY CAPITAL
The change from the paid-in system to the contributory system of company-registered capital has been implemented for ten years and has played a positive role in reducing the threshold of market access and improving the efficiency of shareholders’ capital utilization, especially in easing the financial pressure on start-ups, enabling entrepreneurs to flexibly deploy their capital, and greatly stimulating the market vitality and enthusiasm for innovation and entrepreneurship.
However, at the same time, the drawbacks of the loose contribution system are also becoming more and more prominent, such as huge registered capital is common, and even the registered capital amount filled into the cell phone number, the establishment of a million billion registered capital of e-commerce companies of the alarming case; in addition, the period of paid-in capital is often too long, such as twenty or thirty years or even longer, in the shareholders to complete the paid-in before the company may not have sufficient operating capital so that company The rights and interests of creditors are not protected. Therefore, registered capital in many cases can no longer accurately reflect the creditworthiness of an enterprise.
The new Company Law has changed the payment term of registered capital from the previous to a limited period payment term, i.e., full contribution within five years from its establishment. The only exception is where laws, administrative regulations, and decisions of the State Council provide otherwise. Moreover, the new Company Law also stipulates that in the case of capital increase, the contribution of shareholders to the new capital shall also be carried out in accordance with the provisions on the payment of capital at the time of establishment.
For the newly established companies, they should apply this “5-year” payment term. For existing companies, the second article of the Provision applies, i.e., there exists a three-year Transition Period. A detailed explanation of the term “Transition Period” has been clarified in the Interpretation of Implementation Support Rules of the new Company Law. For limited companies, a lenient “3+5” transition period rule is adopted, where the remaining period of contributed capital is less than 5 years from 1 July 2027, no adjustment is required; where it is more than 5 years, the remaining period of contributed capital shall be adjusted to 5 years by 30 June 2027 and recorded in the articles of association. The shareholders shall pay their contributions in full within the adjusted contribution period.
Based on the information provided, the following three important points in time and two objects of consideration should be considered before an existing company takes action:
Points in time- 30 June 2027
- 30 June 2032
- Contribution period in the AOA
Objects of Consideration
- Capital contributed proportion
- Business operations and plans for the next 3-5 years
In general, most companies that need to make change are faced with two choices, either to amend the capital contribution period in their articles of association and make full paid-up registered capital, or to reduce their capital.
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