Viewpoint... Under the background of the new company law, lawyers handle the practice of capital reduction of limited liability companies.

Capital reduction; circumstances and purpose of capital reduction; legal liability for illegal capital reduction; capital reduction process; capital reduction content; common problems of capital reduction business

Capital reduction means that a limited liability company reduces its registered capital in accordance with actual needs. The reduction of capital is specifically manifested in the reduction of the registered capital of the limited liability company, the reduction of the proportion of shareholders' equity, and the reduction of shareholders' contributions or paid-in capital contributions.

1, reduce the shareholders' capital contribution obligations.

The first paragraph of Article 47 of the new company law stipulates that the capital contribution subscribed by shareholders shall be paid in full within 5 years from the date of establishment of the company. The second paragraph of Article 266 of the new company law stipulates that for limited liability companies that have been established before the implementation of the new company law, the capital contributions subscribed by shareholders shall be gradually adjusted to be paid in full within 5 years. For limited liability companies with obviously abnormal capital contributions, the company registration authority may require them to make timely adjustments in accordance with the law.

The provisions of the State Council on the implementation of the registration and management system of registered capital of the the People's Republic of China company law (Draft for comments) clearly sets a three-year transition period for the stock companies established before the implementation of the new company law, from July 1, 2024 to June 30, 2027. A limited liability company may adjust the period of capital contribution to less than five years during the transition period, and the completion of capital contribution before June 30, 2032 will meet the requirements of the new company law.

Shareholders of limited liability companies who have paid large capital contributions before the implementation of the new company law are under great pressure to pay large capital contributions within a certain period of time after the implementation of the new company law. In order to circumvent the mandatory requirement to pay up the capital contribution within a certain period of time, it is necessary to reduce the capital (reduce the amount of capital contribution paid by shareholders) and is also a priority option.

2, to make up for the company's losses of capital reduction.

Article 225 of the new Company Law stipulates that a limited liability company may reduce its registered capital to make up for losses. If the registered capital is reduced to make up for the losses, it shall not be distributed to the shareholders, nor shall the shareholders be relieved of their obligation to pay their capital contributions.

This reduction of capital, the shareholder's capital contribution obligation does not change, but the shareholder's capital contribution that should have been attributed to the registered capital is used to make up for the company's losses, I .e. the amount of the company's registered capital reduction is consistent with the amount of the company's loss reduction.

3, to avoid the registered capital idle capital reduction.

The capital required for the operation and development of a limited liability company is less than the registered capital. In order to avoid the registered capital being idle, the registered capital paid by all shareholders shall be reduced year-on-year or different, so that the idle registered capital shall be returned to the shareholders in accordance with the law.

4, to meet the specific transaction of the reduction of capital.

Shareholder withdrawal, equity realization, equity structure due to corporate financing, mergers and acquisitions or other specific purposes need to be adjusted, etc., can be achieved through capital reduction.

5. Capital reduction after equity pledge

Capital reduction, for the shareholders of a limited liability company, is a reduction or zero shareholding. A capital reduction in a pledge of equity, for the pledgee, is a reduction or zero in the value of the property of the pledged equity.

According to Article 433 of the Civil Code, when the equity pledge is reduced, the right holder has the right to request the shareholders to provide alternative security, and if the shareholders do not provide alternative security, the right holder has the right to directly auction or sell the pledged equity to guarantee the realization of their own claims. After the equity of the limited liability company is pledged, the capital reduction shall obtain the consent of the pledgee. If the pledgee does not agree, the reduction may still be made as long as alternative security is provided to ensure the realization of the pledgee's claim.

6, the repurchase of equity capital reduction.

A limited liability company may not buy back its own shares, but under any of the following circumstances, it may buy back its shares by way of capital reduction.

(1) The dissenting shareholder requests the limited liability company to buy back. According to the first paragraph of Article 89 of the new Company Law, when the shareholders' meeting of the company makes a resolution of non-distribution of profits, merger and division of the company, transfer of major property, or when the company should be dissolved and the shareholders' meeting does not dissolve, the shareholders who vote against the resolution have the right to request the company to buy back its shares and reduce its capital at a reasonable price.

(2) The small and medium-sized shareholders request the limited liability company to buy back. According to the third paragraph of Article 89 of the new company law, if the controlling shareholder of a limited liability company abuses the rights of shareholders and seriously harms the interests of the company or other shareholders, the minority shareholders have the right to request the company to buy back its shares and reduce its capital at a reasonable price; according to the first paragraph of Article 219 of the new company law, the minority shareholders have the right to request the company to buy back its shares and reduce its capital at a reasonable price.

(3) The investor requests a buyback by a limited liability company as a financier. According to Article 5 of the "Minutes of the National Court Civil and Commercial Trial Work Conference" (Law [2019] No. 254), the investor requests the limited liability company to repurchase the equity based on the gambling agreement. If there is no statutory circumstance that invalidates the gambling agreement, the limited liability company can only repurchase when the capital reduction procedure is completed, otherwise it violates the mandatory provision of Article 53 of the new company law that shareholders are not allowed to withdraw capital.

1. Formal and substantive capital reductions

(1) The first and second capital reduction cases are formal capital reduction.

Formal capital reduction is only in the form of the company's books to adjust, at the same time reduce the amount of registered capital and change registration, in essence, shareholders did not obtain capital reduction consideration, the company's assets and liabilities, net assets and solvency, etc. have not changed.

According to the second paragraph of Article 225 of the new Company Law, a limited liability company does not need to notify or announce creditors in the event of a capital reduction, nor does it need to pay off debts or provide guarantees to creditors as a result of the capital reduction, but it shall make a capital reduction announcement in a newspaper or in the national enterprise credit information publicity system. Formal capital reduction does not involve the valuation of the assets of the limited liability company or the valuation of the company as a whole (equity valuation) because it does not pay the reduction consideration to shareholders.

(2) The third to sixth types of capital reduction are substantial capital reduction.

In the third to sixth cases of capital reduction, the limited liability company shall pay the capital reduction consideration to the shareholders, the registered capital and net assets of the company will be reduced, and the solvency will be reduced.

According to Article 224 of the new company law, a limited liability company shall prepare a balance sheet and a list of property in the event of a substantial capital reduction, notify and announce creditors, and pay off debts or provide security at the request of creditors. A substantial capital reduction requires the payment of a capital reduction consideration to shareholders and therefore a valuation of the assets of the limited liability company or a valuation of the company as a whole (equity valuation).

2. Year-on-year and non-year-on-year capital reduction

(1) Year-on-year capital reduction

According to the third paragraph of Article 224 of the new company law, if a limited liability company reduces its registered capital, it shall reduce its capital contribution in accordance with the proportion of shareholders' capital contribution, unless otherwise provided by law or otherwise agreed by all shareholders of a limited liability company. After the year-on-year capital reduction, the proportion of shareholders' equity remains unchanged and the company's equity structure remains unchanged.

(2) Non-year-on-year capital reduction

A non-year-over-year capital reduction is a capital reduction that requires a change in the company's shareholding structure in order to meet a specific purpose or to achieve a specific transaction. After the non-year-on-year capital reduction, the company's registered capital decreased, the shareholding ratio of each shareholder changed, and even individual shareholders withdrew from the company. According to the third paragraph of Article 224 of the new Company Law, non-year-on-year capital reduction requires the unanimous consent of all shareholders before the capital reduction or as otherwise provided by law.

Illegal capital reduction, the limited liability company shall bear the timely correction, payment of fines and other administrative responsibilities. Article 253 of the new company law stipulates that if a shareholder withdraws his capital contribution after the establishment of a company, the company registration authority shall order it to make corrections and impose a fine of not less than 5% but not more than 15% on the company, and impose a fine of not less than 30000 yuan but not more than 300000 yuan on the directly responsible person in charge and other directly responsible personnel. Article 255 of the new company law stipulates that if a limited liability company fails to notify or announce its creditors when reducing its registered capital, the company registration authority shall order it to make corrections and impose a fine of not less than 10,000 yuan but not more than 100,000 yuan on the company.

1, the company to bear the return of property, compensation for losses of civil liability.

Illegal capital reduction is an invalid civil legal act because it violates the mandatory provisions of Article 53 and Article 224 of the new company law. The capital reduction is invalid and, in accordance with Article 157 of the Civil Code, shall bear civil liability for the return of property and compensation for losses.

Article 266 of the new company law stipulates that the consideration for illegal capital reduction obtained by shareholders shall be returned to the company, or the capital contribution obligation exempted from illegal capital reduction shall continue to be performed, and the capital contribution shall be paid immediately upon the expiration of the capital contribution period; if the illegal capital reduction causes losses to the company, the shareholders and the responsible directors, supervisors and senior managers shall be liable for compensation to the company.

2, to assume supplementary liability to creditors.

When the creditor knows that the company has reduced its capital, it may require the company to pay off its debts or provide security. When the creditor does not know that the company has reduced its capital because it has not been notified, before the company corrects the illegal capital reduction, the creditor may refer to Articles 13 and 14 of the judicial interpretation (III) of the company law to require the capital reduction shareholders to pay the company within the scope of the capital reduction. Debts bear supplementary liability, or in accordance with Article 54 of the new company law, require the capital reduction shareholders to pay the subscribed but not yet due capital in advance to repay to repay the company's debts.

1. Due Diligence.

The focus and content of due diligence will vary depending on the circumstances and purpose of the capital reduction. Generally speaking, lawyers, with the assistance of the staff of audit institutions, evaluation institutions and tax advisory bodies, investigate and understand the following contents by collecting written materials and documents, conversation records, on-site investigation, and making inquiries to the administrative department or the Internet official website system.

(1) Investigate and understand the qualifications of the company's main body to determine whether its existence is legal and valid.

Investigate and understand the approval documents for the establishment of limited liability companies, business licenses, articles of association, mergers, divisions and capital reductions, industrial and commercial change registration, annual inspections and other matters, and specific qualifications or administrative licenses for specific industries or projects.

(2) Investigate and understand the qualifications of the shareholder entity to determine whether it is legal and valid.

Investigate and understand the subject situation: if the shareholder is an enterprise legal person or an unincorporated organization, the content of the investigation and understanding is the same as above; if the shareholder is a natural person, he needs to know basic information such as name, age, gender, etc., and meet with him or her if necessary. Investigate and understand the capital contribution: the amount of capital contribution, the mode of capital contribution, the period of capital contribution, the amount of capital contribution paid, whether it is in place, whether the valuation of non-monetary capital contribution is fair, whether the equity is frozen or pledged, etc. Investigate and understand the transfer of shares: the resolution of the shareholders' meeting of the transfer of shares, the transfer agreement, whether the notification procedure is fulfilled, whether the right of first refusal of other shareholders is infringed, whether there is a situation of holding on behalf of others, etc.

(3) Investigate and understand the company's property and liabilities to provide a basic factual basis for the preparation of a balance sheet and inventory of property and for the valuation of the company's assets or the company as a whole.

Investigate and understand the company's property list, ownership certificates and related contracts, whether they have been seized or frozen, external guarantees and contracts, claims and debts (especially the debts due before the base date) and contracts, major contracts that are about to be or are being performed, and disputed contracts.

(4) Investigate and understand the company's articles of association, rules and regulations, so that the capital reduction is compliant and legal.

Investigate and understand laws and regulations, articles of association and rules and regulations, investor agreements and other relevant provisions or contents on capital reduction, so as to provide legal basis for capital reduction.

(5) Investigate and understand the company's tax situation and provide a basic factual basis for tax treatment before and after the capital reduction.

(6) Investigate and understand the company's litigation, arbitration and enforcement cases and administrative penalties to determine whether it will increase the company's liabilities and whether it will adversely affect or obstruct the reduction of capital.

(7) What auditors, assessment agencies and tax advisory bodies consider necessary to know.

2, the preparation of due diligence report.

Lawyers shall prepare due diligence reports in accordance with laws, regulations, rules and normative policy documents, in accordance with the authorization of the company to be reduced, and in accordance with the recognized business standards, ethics and diligence of the lawyer industry. In general, a due diligence report may include the following.

(1) Purpose and scope;

(2) working procedures, working methods, working hours and working processes;

(3) Materials and documents collected for due diligence;

(4) Company profile, existing shareholders, shareholding structure, shareholding restrictions, profile of the shareholders to be reduced, and the appointment of directors, supervisors and senior executives recommend by the shareholders to be reduced;

(5) The company's assets and liabilities (main contents of the audit report);

(6) Valuation of the company's assets or the company as a whole (key elements of the valuation report);

(7) Restrictive provisions of laws and regulations, articles of association, resolutions of resolution organs, rules and regulations on capital reduction and the appointment of directors and supervisors of the company;

(8) The company's tax situation.

1, the preparation of capital reduction program.

The focus and content of the capital reduction programme vary according to the circumstances and purpose of the capital reduction. Generally speaking, the capital reduction plan should include the following contents.

(1) If a state-owned enterprise decides to reduce its capital by resolution of the shareholders' meeting, it shall perform the examination and approval procedures and obtain approval documents. The resolution of the shareholders' meeting may together determine the base date for capital reduction.

(2) The resolution authority (the shareholders' meeting, the board of directors or the board of supervisors) stipulated in the articles of association of the company may decide whether to employ an audit institution, an evaluation institution or a tax consulting institution.

(3) Prepare the company's balance sheet and property list.

(4) Determine the valuation of the company's net assets. Shareholders may negotiate the recognition of the fair value of net assets, or they may be determined on the basis of the opinion of the appraisal agency.

(5) Capital Reduction Agreement. The capital reduction agreement concluded between the company and the shareholders to be reduced may generally include the following contents: registered capital, paid-in registered capital, register of shareholders and equity structure of the company before capital reduction; year-on-year or non-year-on-year capital reduction and amount of capital reduction; registered capital, paid-in registered capital, register of shareholders and equity structure of the company after capital reduction; consideration for capital reduction, payment method and time limit, clarify the delivery date and the registration of change of ownership; recover or renew the capital contribution certificate; if the company's shareholders shall bear the corresponding legal liability according to law for the debts incurred during the transition period, the reduced shareholders shall bear the legal liability according to the proportion of equity before the capital reduction.

(6) Notice, announcement of creditors.

Notification of known creditors. A limited liability company shall, by writing, e-mail, fax or instant messaging system, inform the creditors identified before the capital reduction and the creditors arising before the industrial and commercial registration of the capital reduction.

Announcement of unknown creditors. Publish a capital reduction announcement in a newspaper or the national enterprise credit information publicity system to notify unknown creditors.

(7) Paying off debts due or providing security for debts.

When a company with external liabilities reduces its capital, it is a prerequisite for the reduction of capital in accordance with the law, in accordance with the creditor's request to pay off the debt due or to provide a guarantee for the debt. According to the provisions of Article 54 and Article 266 of the new company law, if the debts due cannot be paid off, not only the purpose of capital reduction cannot be realized, but also the capital contribution obligations of shareholders should be accelerated; no guarantee can be provided for the outstanding debts, and the purpose of capital reduction cannot be realized.

(8) Adjustment of the company's directors and supervisors after the capital reduction.

(9) After the capital reduction, amend the articles of association of the company and register the industrial and commercial changes in the registered capital, the register of shareholders and the shareholding structure, and the appointment of the directors and supervisors.

(10) Deal with the value-added tax, stamp duty, deed tax, income tax and other issues involved in the company and shareholders after the capital reduction, so as to avoid tax violations. If an auditor or tax advisory body is engaged, it may be determined on the basis of their opinion.

(11) Transitional arrangements.

The transitional period refers to the date from the base date of capital reduction to the date of completion of the registration of industrial and commercial changes in the articles of association, registered capital, register of shareholders and equity structure. The company's debts incurred during the transition period shall be borne in proportion to the equity before the capital reduction, if the shareholders of the capital reduction shall bear the corresponding legal liability in accordance with the law.

2, the implementation of the reduction program.

(1) To guide and assist the company in convening shareholders' meetings in accordance with the law to vote on the company's capital reduction and capital reduction plans. Resolutions of the shareholders' meeting shall be adopted by shareholders representing 2/3 or more voting rights. At the same time, the reduced registered capital of the company shall not be lower than the minimum amount of registered capital stipulated by laws and administrative regulations. If the ratio of capital reduction varies among shareholders, it requires the unanimous consent of all shareholders or special provisions of the law.

(2) Drafting capital reduction agreements and assisting the company in entering into capital reduction agreements with shareholders to be reduced.

(3) Drafting notices and announcements of capital reductions, and collecting, fixing notices and announcements of evidentiary materials on the proposed capital reductions of creditor companies.

(4) Guide, assist and supervise the company to meet the creditor's request to pay off the due debts and fix the evidence materials for paying off the due debts; Draft the written materials required for the guarantee contract and guarantee registration, guide, assist and supervise the company to meet the creditor's request for providing guarantee for the debt, and conclude the guarantee contract with the creditor and go through the registration formalities after the guarantee matters are decided by the company's resolution organ.

(5) Inform the company in writing of the legal consequences of failing to satisfy the creditor's request to pay off the debt due or to provide security for the debt, and obtain a written receipt.

(6) Assist the company in the approval of capital reduction, change registration and other procedures. Submit the certificate of the announcement of the capital reduction and the statement of the company's debt settlement or debt guarantee.

(7) Work closely with auditors or tax advisory bodies to assist in dealing with tax-related issues of the company and reduced shareholders.

(8) To issue legal opinions on difficult legal issues encountered in the preparation and implementation of the capital reduction program.

Capital reduction belongs to the category of internal governance of the company. Whether the resolution of the shareholders' meeting on capital reduction is valid or can be revoked shall be judged in accordance with articles 26 and 28 of the new company law and the relevant provisions (IV) the judicial interpretation of the company law. Creditors request to confirm that the resolution of shareholders on capital reduction is invalid or apply for its revocation, which has no legal basis. Creditors cannot prevent a limited liability company from reducing its capital on the grounds that they request confirmation of the invalidity of the shareholder's resolution to reduce its capital or apply for its revocation.

Capital reduction falls within the scope of internal corporate governance and does not require the consent of creditors. The failure to notify the creditors of the capital reduction or the disagreement of the creditors after the notification will not affect the legal effect of the company's capital reduction, but the company shall not use the capital reduction to oppose the creditors, and the creditors still have the right to require the company to be responsible for the company's debts within the original registered capital. Capital reduction shareholders should still perform their capital contribution obligations within the original capital contribution.

1. Request the company to repay the debt or provide a guarantee.

A limited liability company and a shareholder with reduced capital cannot damage the legitimate rights and interests of creditors on the grounds of capital reduction. When a limited liability company reduces its capital, creditors may request the company to pay off its debts or provide guarantees for its debts in accordance with Article 224 of the new Company Law.

2, the request to reduce the shareholders to bear the liability.

If the company refuses to pay off its debts or provide guarantee during the capital reduction, the creditor may refer to Articles 13 and 14 of the (III) Judicial Interpretation of the Company Law to require the capital reduction shareholders to bear supplementary compensation liability for the company's debts within the scope of the capital reduction; the creditor may also According to Article 236 of the New Company Law, the capital reduction shareholders are required to return the capital reduction proceeds to the company, and even in accordance with Article 535 of the Civil Code, to file a subrogation lawsuit against the reduced shareholders in their own name, the reduced shareholders are required to be liable for the company's debts within the scope of the reduction.

The case of the 2017 bulletin of the Supreme People's Court, "Shanghai Delixi Group Co., Ltd. v. Jiangsu Boenshitong High-tech Co., Ltd., Feng Jun and Shanghai Boenshitong Optoelectronics Co., Ltd. Disputes over Sales Contracts", holds that the company should perform the obligation of notification to creditors who are known or should be known when reducing capital, and cannot directly replace the obligation of notification by a public announcement in the newspaper without prior notice; if the company fails to fulfill its obligation to notify known or ought to be known creditors in accordance with the law at the time of capital reduction, and the shareholders of the company cannot prove that they are not at fault in the process of capital reduction, when the company is unable to pay the debt before the capital reduction, the shareholders of the company shall bear supplementary liability to the creditors for the debt.

Creditors formed before the resolution of the shareholders' meeting on the reduction of the company's capital, and creditors formed after the resolution of the shareholders' meeting on the reduction of capital and before the industrial and commercial registration of the change of capital reduction, are creditors known or should be known to the company. The company shall notify known or should know creditors in writing, e-mail, fax or instant messaging system for the contents of the resolution of the shareholders' meeting on capital reduction.

The second paragraph of Article 224 of the new Company Law stipulates that the company has the obligation to notify creditors of capital reduction matters, and does not stipulate that shareholders of capital reduction have the obligation to notify creditors. The capital reduction shareholders are the beneficiaries of the company's capital reduction, and according to the principle of consistency of rights and obligations, the capital reduction shareholders are also obliged to notify the creditors of the company's capital reduction. If the reduced shareholder fails to notify the creditor, there is a subjective fault and may be liable for damages for the fault.

When a company changes its industrial and commercial registration after capital reduction, the market supervision department will often require the capital reduction shareholders to issue a letter of commitment, promising to bear joint and several liability for the company's outstanding debts. Can creditors rely on the commitment to require the reduction of shareholders to bear joint and several guarantee liability?

The letter of commitment is issued by the capital reduction shareholders in order to meet the requirements of the market supervision department for change registration, otherwise the market supervision department will not handle the capital reduction change registration. The first paragraph of Article 3 of the Judicial Interpretation of the General Principles of Contracts of the Civil Code stipulates that if the name or names, subject matter and quantity of the parties to the contract are not clear, the contract shall not be established. If the undertaking does not specify the creditor of the security, the nature and amount of the claim, and the guarantee contract is not established, the creditor cannot require the reduced shareholder to bear joint and several guarantee liability on the basis of the undertaking.