Recent Changes to the Chinese Companies Law and its Implications
2014-08-12 11:30:33   Source:   Hit:

7th March 2014
Gordon Xu, Joaquín Ming Liu
A most recent amendment to the Chinese Companies Law (CCL) has been passed by the Standing Committee of the National People’s Congress on 28th December 2013. The amended provisions shall take effect from 1st March 2014.
This amendment can be viewed as the most significant among the three amendments since 1993. This article seeks to highlight some important changes made in this amendment while providing a brief analysis on its bearings.
A.     Main Changes to the CCL
The latest amendment totals 12 changes, and the important ones are as follows:
1.       Removal of the Minimum Registration Capital Requirements
The provisions in the original CCL stipulating a threshold Registration Capital (RC) of RMB 30, 000, RMB 100, 000 and RMB 5, 000, 000 for limited liability companies (LLC) (original section 26), single person limited liability companies (original section 59), and private limited companies (PLC) (original section 81) have been repealed.
Subsequent to that, subscribers of LLCs (section 23(2)) and PLCs (section 76(2)) no longer need to meet the minimum RC requirements when incorporating companies. It is now sufficient to provide for any one of the following: the subscribed capital contribution, share capital subscribed by all sponsors in accordance to the articles of association or the paid-in share capital offered to the public. Also, the minimum RC requirement in relation to capital reductions has been lifted (section 178).
Nevertheless, if other laws, administrative regulations and decisions by the State Council expressly provide to the contrary, then the minimum RC provisions shall apply. That said, the RC thresholds still apply towards security companies, commercial banks, insurance and international shipping agency companies.
2.       Lifting of the Requirements concerning the Means of Capital Contribution
The provision mandating a minimum of 30% of the RC to be made in cash contributions has been cancelled (original section 27). It is now at the sole discretion of subscribers in deciding the ratio of cash and non-cash assets, including tangible goods, intellectual property and land rights in the initial capital contribution.
3.       Cancellation of the Prescribed Timeframe for Full Payment
The original CCL contains a requirement that the RC is to be paid in full within two years - with a longer timeframe of 5 years for investment companies (original section 26); this has been withdrawn in the newly amended CCL. Instead, subscribers are only required to provide in the articles of association of the company the amount of capital they are committed to subscribe. This sees the switch from a “capital paid-in system” to a “capital subscription system”.
Allegedly, it is no longer required to include the paid-in capital in the business licence for LLCs, single person limited liability companies and PLCs. However, disclosure of the subscribed capital is still mandated in business licences.
4.       Removal of the Capital Verification Requirement
The amendment also abolishes the provisions (original sections 29, 48) which made it obligatory for subscribers of LLCs and PLCs to submit a capital verification report prepared by an authorised institution.
B.      Some Major Implications
The main changes brought by the CCL amendments can be viewed as three-fold – simplified registration formalities, relaxed RC requirements and facilitated registration procedures. The amendments seek to mirror and meet the needs of the contemporary economic development level, socioeconomic structure, and economic system in China.
The major implications of this amendment are:
1.      Incentivise Individual Entrepreneurship and Stimulate Growth in Individual Economy
China’s economy is envisaged to experience a low or even stagnant growth in the coming years, which would in turn draw upon serious employment concerns. The removal of the RC thresholds, cancellation of the prescribed timeframe for full payment and the lift of other barriers such as capital verification and 30% cash capital seek to facilitate and reduce the cost for the incorporation of companies. This will then in turn further encourage entrepreneurship and ultimately improve the innovation in the Chinese economy.
2.      Adoption of a Capital Subscription System and Promotion of a Credit Rating System for Companies
The minimum RC requirements and the prescribed 2-year timeframe for full payment in the incorporation of companies provided in the original CCL can be loosely viewed as a capital paid-in system. In this system, a company’s paid-in capital serves not only as an indicator of its financial strength, but also a guarantee to the secured enforcement of its creditors’ rights. The switch of focus from a capital paid-in system to a capital subscription system means that any individual can simply incorporate a company with high registered capital without the need to make a full capital contribution in due course. Therefore, it is in the best interests of prospects wishing to involve in large-scale transactions with high registered capital companies to take extra care in checking their credit rating and shareholder information.
Having said that, the State Administration of Industry and Commerce (SAIC) are striving to build a corresponding credit system for companies, shareholders, directors, senior managers and other main market operators. Also, the Supreme People’s Court has given instructions for judgments and reports on the enforcement of orders to be published on the internet so that the public may conduct its own research on the credit rating of a company.
Besides, we should observe that the SAIC have made available to the public the shareholding and capital contribution details of all domestic incorporated companies on a nationwide database ( named the National Companies Credit Information Public Disclosure System. This switch of focus from administrative supervision to public post-registration supervision is anticipated to increase both transparency and accountability of company regulations and information provided.
China is expected to seize this opportunity to establish and enhance the credit system of the market economy.
3.      Lowering the Market Barriers and Advancing the Freedom of Competition
The essence of free competition is that the success or failure of companies qua market players is left to be determined by the market. This necessarily entails the absence of high barriers which may impede the entry of innovative companies into the market. Lately, the 3rd Plenary Session of 18th CPC Central Committee it was quoted that the “economic reform is the (sic) key, and the core solution is the proper relationship between the government and the market, leaving the market to play the decisive role in allocation of resources”.
The recent amendment to the CCL is viewed to have implemented this principle. The new law shall facilitate the incorporation and annual report process of sole traders, single person limited companies and partnerships. It is also anticipated that the three special legislations governing foreign investment (Wholly Foreign-owned Companies Law, Law on Chinese-Foreign Joint Ventures, and the Law on Chinese-Foreign Contractual Joint Ventures) are to be repealed in due time to secure equal treatment of foreign and domestic investors in Chinese company laws.