Viewpoint | Legal analysis of capital contribution by "creditor's rights to third parties"

Published:

2023-03-28

With the reform of the company system and the diversification of investment forms, capital contribution in the form of creditor's rights is gradually included in the scope of investors' choice. It is very common for investors to convert their claims on the subject company into equity in the subject company, but there is no clear stipulation as to whether "claims on third parties" are a legal and protected form of capital contribution. Contribution by "claim to three persons" means the way in which the investor contributes to the subject company with his or her claim to a third party other than the subject company. Relevant 1. laws and regulations and their evolution (I) relevant legal provisions According to the revision and evolution of the above-mentioned company law, the provisions of the company law on the form of shareholders' capital contribution are revised from the enumeration form in 1993, that is, "capital contribution can be made in currency, or in kind, industrial property rights, non-patented technology and land use rights as capital contribution", to "capital contribution can be made in currency, or non-monetary property that can be valued in currency and can be transferred according to law, except for property that which cannot be used as capital contribution according to laws and administrative regulations", it also lists non-monetary assets that can be funded in kind, intellectual property rights and land use rights. However, the company law has never made a clear provision on the possibility of making capital contributions by "claims to third parties. Regulations of relevant (II) departments The "Administrative Measures for the Registration of Corporate Debt-to-Equity Conversion" implemented on January 1, 2012 clarified for the first time that creditor's rights can be used as one of the ways of shareholder capital contribution, that is, debt-to-equity conversion, but it did not involve whether to allow capital contribution by "creditor's rights to third parties. The regulations on the Administration of the Registration of registered Capital of companies (2014), which came into effect on March 1, 2014, abolished the above-mentioned measures for the Administration of the Registration of the conversion of Corporate creditor's Rights into Equity, and deleted that the creditor's rights converted into company equity should comply with the provisions on the conversion of contractual debts between creditors and companies into company equity in the operation of the company. The "Detailed Rules for the Implementation of the Regulations on the Registration and Administration of the People's Republic of China Market Entities" (hereinafter referred to as the "Detailed Rules for the Implementation of Registration and Administration") implemented on March 1, 2022 abolished the "Regulations on the Registration and Administration of Company Registered Capital (2014)", although it is still unclear whether The company is funded by "creditor's rights to third parties", but the original provisions on capital contribution by creditor's rights are revised, it should be clear and complete, and can be evaluated and transferred in accordance with the law, in accordance with the provisions of the articles of association of the company ", and it is not prohibited to make capital contributions with" claims on third parties. 2. relevant judicial precedents that recognize the effect of "claims on third parties". (I) Li Xiangcai and Changchun Zhengda Real Estate Development Co., Ltd. and Changchun Construction State-owned Assets Management Co., Ltd. Shareholder Investment Dispute Re-trial Case-(2020) Ji Min Shen No. 694 The judgment of the Jilin Provincial Higher People's Court: The first paragraph of Article 24 of the the People's Republic of China Company Law promulgated in 1993 stipulates: "Shareholders may make capital contributions in money, or they may make capital contributions in kind, industrial property rights, non-patented technology, and land use rights. The real thing, industrial property rights, non-patented technology or land use rights as capital contributions must be evaluated and the property must be verified, and the price must not be overvalued or undervalued. The valuation of land use rights shall be handled in accordance with the provisions of laws and administrative regulations." The aforementioned law does not restrict shareholders from making capital contributions with creditor's rights, and the creditor's rights have actual value. According to the "certificate" issued by the general office of Changchun Municipal People's Congress on May 18, 2011 and the "situation statement" issued by Jiyang company on January 30, 2011 and related transfer bills, the creditor's rights and contributions involved in the case have been repaid by the general office of Changchun Municipal People's Congress and Changchun industrial management cadre school respectively. (II) Chen Xiuhua and State Energy Group Ningxia Coal Industry Group Co., Ltd. Re-trial of Contract Dispute-(2019) Jingmin Shen No. 4656 The judgment point of view of the Beijing Higher People's Court: According to the evidence in the case, it can be concluded that the signing of the Transfer Agreement and the Investment Joint Venture Contract is essentially the consideration paid by Shenhua Company to acquire the equity of Baiji Jinguo Company with its creditor's rights to Fengchen Company and its Xining Branch. The nature of the creditor's rights of 12.6036 million yuan is essentially a special way of equity contribution. The debtor Fengchen Company sold the property of the subject matter to be executed without authorization, which made the execution case impossible, resulting in the fact that Ningxia Coal Industry Company could not perform its capital contribution obligation by realizing its creditor's rights. Ningxia Coal Industry Company shall continue to pay the remaining price in accordance with the agreement of the Memorandum and compensate for the interest loss arising from the failure to pay in time due to the breach of contract. Ningxia Coal Company shall fulfill its capital contribution obligation when it signs the Transfer Agreement on October 25, 2001, so the interest shall be calculated from the date on which Ningxia Coal Company shall fulfill its obligation to pay the equity consideration. (III) Yang Xueqing and Yizheng Zhentong Copper Co., Ltd., Zhu Yong, Xie Jianxin, Yizheng Yuetang Town Agricultural Comprehensive Service Center Dispute Appeal Case-(2011) Su Shang Zhongzi No. 0156 The judgment of the Jiangsu Provincial Higher People's Court: China's law does not explicitly prohibit shareholders from using their claims to third parties as capital contributions, and the original judgment held that the relevant laws of our country denied the effect of shareholders using their claims to third parties as capital contributions, and the reason for the judgment lacked legal basis, and the Court corrected it. However, as mentioned above, the creditor's rights of 4.99 million yuan in the net assets of the original Zhentong Material Factory contributed by Yang Xueqing, Zhu Yong, Xie Jianxin and others are actually formed by the withdrawal of the contribution of Zhentong Material Factory, and the debtor Taizhou Spotlight Company will be canceled within a few days after receiving the payment. There is no other evidence to show that the creditor's rights have been realized or can be realized in the future, therefore, the original judgment held that Yang Xueqing, Zhu Yong and Xie Jianxin had significant defects in the use of the creditor's rights as capital contributions, and should bear the corresponding supplementary liability if the defects were not made up. This view and the corresponding judgment made accordingly are correct. If the investor effectively makes up for the defects of capital contribution within a reasonable period of time, it shall be determined that he has fulfilled the obligation of capital contribution. Therefore, if the creditor's rights of 4.99 million yuan against Taizhou Spotlight Company recorded in the accounting books of Zhentong Material Factory have been realized, Yang Xueqing, Zhu Yong and Xie Jianxin do not need to bear the corresponding supplementary compensation liability for the 4.99 million yuan. However, judging from the facts found out in this case, the existing evidence is not sufficient to prove that Zhentong Material Factory's claim of 4.99 million yuan to Taizhou Focus Company has been realized. Therefore, the original judgment that Yang Xueqing, Zhu Yong and Xie Jianxin bear the corresponding supplementary compensation liability is correct. The conditions to be met by the "claims on third parties" used by the 3. to contribute capital. Clear ownership and integrity of (I) The funder shall have a direct right basis for the "claims on third parties" used to contribute, I .e. the rights of "claims on third parties" formed through specific legal relations shall be vested in the funder. At the same time, the "claim to a third party" used to contribute capital should be free from other rights burdens or defects in rights, the creditor should have fulfilled all the obligations corresponding to the right to exercise the claim, the creditor has the right to exercise the right to the debtor, and the debtor has no other defenses. (II) may be assessed and transferred in accordance with the law. The "claim to a third party" used to contribute capital should have the value of the asset and the claim should be disposable and negotiable, and the corresponding value can be determined by evaluation. According to Article 545 of the Civil Code, claims may be transferred except for claims that are not transferable according to the nature of the claim, the agreement of the parties or the provisions of the law. In addition, the "creditor's rights to third parties" used for capital contribution should be transferable, and according to the nature of the creditor's rights and legal provisions, it should not be a non-transferable creditor's rights, and there should be no relevant agreement between the investor and the debtor or other interested parties to restrict or prohibit the transfer of creditor's rights. (III) in accordance with the Articles of Association According to the provisions of Article 13 of the Rules for the Implementation of Registration Administration, the provision of capital contribution by the creditor's rights of domestic companies in accordance with the law shall comply with the provisions of the articles of association of the company. Therefore, the subject company's articles of association should not limit the capital contribution of the shareholders of the company to "claims to third parties", otherwise the capital contribution of the funder to "claims to third parties" will violate the relevant provisions of the subject company's articles of association. The (IV) debtor is a domestic company. Article 13 of the Rules for the Implementation of Registration Administration limits the scope of capital contribution by creditor's rights to "creditor's rights of domestic companies". Therefore, when the investor chooses to make capital contribution by "creditor's rights to third parties", it is recommended to choose "third parties" (I. e. debtors) as the creditor's rights of domestic companies. The legal risks and suggestions of 4.'s capital contribution by "creditor's rights to the third party". The legal risk of (I) capital contribution by "creditor's rights to the third party". The current Company Law and the Rules for the Implementation of Registration Administration do not exclude the mode of operation of "creditor's rights to third parties", but the case of "creditor's rights to third parties" is only more common in SPV companies, and very few in operating entities. In view of the fact that the contribution of "claims to third parties" depends on the solvency and willingness of the third party, the third party as a debtor is independent of the funder and the subject company, and there is great uncertainty as to whether the claims can be recovered and the amount of recovery. In addition, the realization of the funder's "claims against third parties" may be subject to litigation or arbitration and enforcement procedures, and there is uncertainty about the period and cost of claims recovery. If a third party has an objection, defense or set-off claim to the claim, it may affect the successful recovery of the claim and the final value of the claim. Article 28 of the Company Law stipulates: "Shareholders shall pay in full and on time the amount of capital contributions they have paid as stipulated in the articles of association of the company. If a shareholder makes a capital contribution in currency, the full amount of the capital contribution in currency shall be deposited in the bank account opened by the limited liability company; if the capital contribution is made in non-monetary property, the transfer of its property rights shall be handled in accordance with the law. If a shareholder fails to pay the capital contribution in accordance with the provisions of the preceding paragraph, in addition to paying the full amount to the company, he shall also be liable for breach of contract to the shareholders who have paid the capital contribution in full and on time"; Article 83, paragraph 2 stipulates: "If the promoter fails to pay the capital contribution in accordance with the provisions of the preceding paragraph, he shall be liable for breach of contract in accordance with the promoter's agreement." Article 9 of the "(III) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law" (hereinafter referred to as "Interpretation III of the Company Law") stipulates: "The capital contribution of non-monetary property has not been evaluated in accordance with the law, and the company, other shareholders or company creditors If it is requested to determine that the investor has not fulfilled the obligation of capital contribution, the people's court shall entrust a legally qualified evaluation agency to evaluate the property. If the price determined by the evaluation is significantly lower than the price set in the articles of association, the people's court shall determine that the investor has not fully fulfilled the obligation of capital contribution in accordance with the law"; the second paragraph of Article 13 stipulates: "if the creditors of the company request that the shareholders who have not fulfilled or fully fulfilled the obligation of capital contribution shall bear supplementary compensation liability for the part of the company's debts that cannot be paid off within the scope of the principal and interest of the non capital contribution, The people's capital contribution shall be supported; the shareholders who have not fulfilled or fully fulfilled their capital contribution obligations have already assumed the above-mentioned responsibilities, and other creditors make the same request, the people's court will not support it"; Article 15 stipulates: "After the investor contributes with non-monetary property that meets the legal conditions, due to Market changes or other objective factors cause the capital contribution to depreciate, and the company, other shareholders or company creditors request the investor to bear the responsibility of making up the capital contribution, the people's capital contribution, the people's court will not support. However, unless otherwise agreed by the parties." According to the above regulations and judicial cases, if the actual value of the "creditor's rights to the third party" property used for capital contribution is found to be significantly lower than the capital contribution value set by the articles of association after the establishment of the company or the delivery of capital contribution, the shareholder who delivers the capital contribution has the risk of making up the difference of its capital contribution and assuming the liability for breach of contract to the shareholder who has paid the capital contribution in full and on time, and the risk of additional liability for the unliquidated portion of the Company's debt to the extent of the unfunded principal and interest. If, after a shareholder contributes with a true and legal "creditor's right to a third party", the contributed property depreciates due to market changes or other objective factors, and the company, other shareholders or creditors of the company request the shareholder to bear the responsibility for making up the contribution, if the parties separately agree on the way to bear the responsibility, there is a risk that the shareholder will bear the corresponding responsibility according to the agreement. The relevant proposal to (II) the contribution of "claims to third parties". 1. Determine that the claim meets the conditions for being the subject of the capital contribution. To make capital contribution with "creditor's rights to third parties", it shall be confirmed that the relevant creditor's rights meet the conditions as the subject of capital contribution, and attention shall be paid to checking the relevant information on the formation of creditor's rights, including but not limited to the contracts formed by the creditor's rights, payment vouchers for current payments, effective judgment documents, articles of association of the subject company and other documents, so as to judge whether the "creditor's rights to third parties" used for capital contribution meet the relevant provisions. 2, the contribution of claims to carry out the assessment procedures. According to the provisions of the second paragraph of Article 27 of the Company Law, "the non-monetary property as capital contribution shall be assessed and valued, and the property shall not be overvalued or undervalued. Where laws and administrative regulations have provisions on valuation, such provisions shall prevail". According to the provisions of Article 9 of the Interpretation III of the Company Law, "if the company, other shareholders or creditors of the company request that the contributor fail to fulfill the obligation of capital contribution, the people's court shall entrust a legally qualified evaluation institution to evaluate the property. If the price determined by the evaluation is significantly lower than the price set in the articles of association, the people's court shall determine that the contributor has not fully fulfilled the obligation of capital contribution in accordance with the law". There are different understandings in practice for the pre-procedure of assessing whether it is a non-monetary property contribution. According to the judgment (2013) Minshen Zi No. 2479, the Supreme Law specifically understands Article 9 of the Interpretation III of the Company Law as follows: "If a shareholder makes capital contribution in non-monetary terms, the legal evaluation and valuation is not a prerequisite for him to fulfill his capital contribution obligations; Only when the company, other shareholders or creditors of the company claim to the court that the shareholders who make capital contributions in non-monetary terms have not fully fulfilled their capital contribution obligations, the court will the evaluation and valuation procedures. In this case, the negotiated price of the right to use the land involved in the case in the articles of association of the US-China High-tech Company and Xiang Hualiang is 15 million yuan. As long as the land use right transfer procedures are handled, it should be regarded as the US-China High-tech Company has fully fulfilled its obligation to contribute capital." However, in order to protect the interests of the company, shareholders, the company's creditors and other parties, when the shareholders make capital contributions as non-monetary property "claims to third parties", it is still recommended to perform the corresponding evaluation procedures and value the claims after verifying that the claims are true, legal, valid and transferable. 3, in accordance with the law to handle the transfer of property rights procedures. According to the provisions of the first paragraph of Article 28 of the Company Law, if a shareholder makes a capital contribution with non-monetary property, he shall go through the formalities for the transfer of his property rights in accordance with the law. Therefore, if the capital contribution is made by "claims to third parties", the funder shall legally transfer the real claims to the subject company and handle the transfer of its property rights in accordance with the law. The investor shall sign the relevant "Creditor's Rights Transfer Agreement" with the target company and the debtor, and the investor shall also sign the "Capital Increase Agreement" and other documents with the target company, and specify in the agreement the cause and time of the creditor's rights, the amount of the creditor's rights, the debtor's situation, the performance of the creditor's rights, the debtor's confirmation of the creditor's rights, the amount of the creditor's rights to be converted into capital contribution and the method of the price, dispute, the dispute resolution and the liability for breach. 4, the implementation of the corresponding resolution or approval procedures. According to Article 37 of the Company Law, "the shareholders' meeting exercises the right to increase the company's

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