Perspective | Summary of Practices on the Recovery of Shareholder Contributions by Administrators in Bankruptcy Proceedings

The People's Republic of China Enterprise Bankruptcy Law: Article 35 stipulates that after the people's court accepts a bankruptcy application, if the contributors of the debtor have not fully fulfilled their contribution obligations, the administrator shall require the contributors to pay the subscribed capital contributions, regardless of the capital contribution deadline.

Several Provisions of the Supreme People's Court on the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II)

Article 20 stipulates that when an administrator brings a lawsuit on behalf of the debtor, claiming that the contributor shall pay the unfulfilled capital contribution or return the withdrawn capital and interest to the debtor in accordance with the law, and the contributor argues that the subscribed capital contribution has not yet reached the payment deadline stipulated in the company's articles of association or that the violation of the capital contribution obligation has exceeded the statute of limitations, the people's court shall not support it.

If the administrator brings a lawsuit on behalf of the debtor based on the relevant provisions of the Company Law, claiming that the promoters and directors and senior management personnel responsible for supervising shareholders' fulfillment of capital contribution obligations, or other shareholders, directors, senior management personnel, actual controllers, etc., who assisted in the withdrawal of capital contributions, shall bear corresponding responsibilities for shareholders' violation of capital contribution obligations or withdrawal of capital contributions, and the property shall be included in the debtor's property, the people's court shall support it.

Article 23, paragraphs 2 and 3, stipulate that if a creditor, through a creditors' meeting or creditors' committee, requests the administrator to legally collect debts from secondary debtors, the debtor's contributors, etc., and the administrator refuses to collect debts without justifiable reason, the creditors' meeting, in accordance with the provisions of Article 22 of the Enterprise Bankruptcy Law, applies to the people's court for the replacement of the administrator, the people's court shall support it.

If the administrator does not collect the debts, an individual creditor, on behalf of all creditors, brings a relevant lawsuit, claiming that the secondary debtor or the debtor's contributors, etc., shall repay or return the debtor's property, or legally apply for a merger of bankruptcy, the people's court shall accept it.

Administrator: Is the legally defined core subject of recovery, fully responsible for taking over the debtor, managing and disposing of bankruptcy property, and has the statutory duty to require shareholders who have not fully fulfilled their capital contribution obligations to pay their capital contributions.

Creditor: When the administrator fails to perform its recovery duties without justifiable reason, the creditors can urge the administrator to perform its duties through the creditors' meeting or creditors' committee, or an individual creditor can represent all creditors to initiate a lawsuit to recover shareholders' capital contributions.

1. Shareholders who have not actually paid their capital contributions: For shareholders who have subscribed but have not actually paid their capital contributions (regardless of whether the capital contribution deadline has expired), the administrator has the right to require them to make up the subscribed capital contributions.

2. Shareholders who have withdrawn their capital contributions: If a shareholder withdraws capital contributions after contributing them, the administrator can represent the company to require them to return the withdrawn capital contributions and interest, and bear supplementary compensation liability for the company's debts within the scope of the withdrawn capital contributions.

3. Relevant personnel who bear supervisory or assisting responsibilities: If the promoters and directors and senior management personnel responsible for supervising shareholders' fulfillment of capital contribution obligations fail to perform their supervisory obligations in accordance with the law, the administrator can claim that they bear corresponding responsibilities for shareholders' violation of capital contribution obligations; if other shareholders, directors, senior management personnel, actual controllers, etc., assist shareholders in withdrawing capital contributions, the administrator can claim that they bear joint and several liability for the part of the capital contributions that were assisted in withdrawing.

In practice, in order to reduce costs and improve efficiency, various innovative paths have been explored:

After taking over the debtor's assets, if the administrator finds that the debtor has not made a true capital contribution and has withdrawn funds, the administrator shall issue a formal written notice to the shareholders of the bankrupt enterprise, requiring them to make up the unpaid capital contribution within a specified time limit. The written notice has multiple functions, such as urging shareholders to accelerate the fulfillment of their capital contribution obligations, clarifying the deadline for shareholders to fulfill their obligations, serving as key evidence in litigation, and preventing shareholders from raising defenses.

If the conditions for applying for a payment order under the Civil Procedure Law are met, the administrator may apply to the competent basic-level court for a payment order, requiring the shareholder to fulfill its capital contribution obligations within a time limit. After the payment order is issued, the debtor shall repay the debt within 15 days of receiving the payment order, or submit a written objection to the people's court. If the debtor does not raise an objection or fail to comply with the payment order within the prescribed period, the creditor may apply to the people's court for enforcement.

Case: The Dongxihu District People's Court of Wuhan City used a "payment order" for the first time in a bankruptcy case to recover shareholders' capital contributions.

In this case, the administrator discovered in the performance of its duties that the debtor's registered capital was 70 million yuan, and all four shareholders had subscribed for capital contributions. Under the guidance of the court, the administrator sent a notice of fulfillment of capital contribution obligations to the shareholders, but received no response. At the creditors' meeting, the administrator disclosed to all creditors its intention to sue to recover the shareholders' due capital contributions. After listening to the report, the bankruptcy judge contacted the shareholders several times to inform them of the legal significance and consequences of the accelerated maturity of the capital contribution obligations. After deliberation by the joint meeting of the enforcement and bankruptcy work, because the litigation to recover capital contributions takes a long time and is costly, it was finally decided that the bankruptcy judge would guide the administrator to apply for a payment order to recover the unpaid capital contributions. On April 12, 2024, the Dongxihu Court issued payment orders to the four shareholders. Afterwards, the shareholders actively reached an agreement with the administrator to repay the creditors' debts before the end of June 2024.

If, after the written notice period expires, the shareholder refuses to fulfill the obligation to make up the capital contribution, the administrator can directly file a lawsuit with the court regarding the shareholder's capital contribution dispute, or apply for arbitration as agreed, requesting the shareholder to fulfill the capital contribution obligation. However, under the subscribed capital registration system, a large number of enterprises have huge subscribed capital amounts. Sometimes, the amount of unpaid capital contributions by the debtor shareholder far exceeds the debts that the enterprise cannot fully repay. If the administrator still collects the unpaid capital contributions from all shareholders, it will lead to high litigation costs and cause great difficulties for the subsequent execution of the case. Therefore, there are certain differences in practice regarding the determination of the scope of collection. Through case retrieval, the following methods can be used for reference in practice:

(1) Collection based on the total amount of unpaid capital contributions

Case: Liang Mou and Jiangsu Company's dispute over the collection of unpaid capital contributions, (2023) Highest People's Court Min Shen 2905

Court's judgment: Regarding Liang Mou's claim that the amount of capital contributions collected by the administrator of Jiangsu Company is far higher than the company's external debts, deviating from the purpose of collecting capital contributions. This court believes that when a company assumes external responsibilities, the effectiveness of the public announcement registration should be respected, while the internal responsibility of the company should respect the internal agreements of the company and its shareholders. According to Article 35 of the Enterprise Bankruptcy Law of the People's Republic of China and Article 13 of Company Law Judicial Interpretation III , the administrator's collection of capital contributions from shareholders who have not contributed capital in the name of the company and for the benefit of the company is justified, and the amount collected is not limited by the amount of the company's external debts. After the company has repaid its external debts, the administrator should fairly distribute the company's assets to all shareholders according to the legal procedures, and fully respect the internal agreements between the company and its shareholders during the distribution process, using this as the basis for internal profit distribution. Liang Mou's claim that the amount of capital contributions collected by the administrator of Jiangsu Company is far higher than the company's external debts, deviating from the purpose of collecting capital contributions, is untenable, and this court does not support it.

(2) Limiting the scope of collection based on the amount of bankruptcy claims and corresponding bankruptcy expenses

Case: Suzhou Company and Xu Mouwei, Lu Mouming, Ni Moufeng, Huang Mouliang's dispute over the collection of unpaid capital contributions, (2019) Su 0585 Min Chu 472

Court's judgment: Article 25 of the Enterprise Bankruptcy Law of the People's Republic of China stipulates that "After the people's court accepts the application for bankruptcy, if the contributors of the debtor have not fully fulfilled their capital contribution obligations, the administrator should request the contributors to pay the subscribed capital contributions, regardless of the capital contribution deadline." This court accepted the bankruptcy liquidation of the plaintiff (Suzhou Company) on September 21, 2018. The shareholders recorded in the company's articles of association and business registration are the defendants Xu Mouwei and Lu Mouming. Although the subscribed capital contribution deadline for shareholders Xu Mouwei and Lu Mouming has not yet expired, according to the provisions of the Bankruptcy Law, the plaintiff's administrator should request the defendants Xu Mouwei and Lu Mouming to pay the subscribed capital contributions to the plaintiff. The subscribed capital contributions of defendants Xu Mouwei and Lu Mouming are 30 million yuan each. Now, the plaintiff, based on the actual situation of the debts in the bankruptcy case, requests that defendants Xu Mouwei and Lu Mouming pay 1.2 million yuan from the 30 million yuan of subscribed capital contributions. This amount does not exceed the amount of capital contributions that defendants Xu Mouwei and Lu Mouming should pay to the plaintiff, therefore, this court supports the plaintiff's litigation request.

Case: Zhejiang Company and Jiang Moumou, Mao Moumou's dispute over the collection of unpaid capital contributions, (2024) Zhe 0122 Min Chu 188

Court's judgment: Since the plaintiff, Zhejiang Company, has entered bankruptcy liquidation proceedings in this case, according to Article 35 of the Enterprise Bankruptcy Law of the People's Republic of China, after the people's court accepts the application for bankruptcy, if the contributors of the debtor have not fully fulfilled their capital contribution obligations, the administrator should request the contributors to pay the subscribed capital contributions, regardless of the capital contribution deadline. At the time of bankruptcy liquidation, the defendants Jiang Moumou and Mao Moumou still had unpaid capital contributions of 30 million yuan and 20 million yuan respectively. Now, the administrator, combining the debt claim reporting situation, the expenses incurred in the bankruptcy case, and the amount of unpaid capital contributions by the shareholders, filed a lawsuit requesting the defendants to pay 300,000 yuan and 200,000 yuan respectively, which is in line with the actual situation and legal provisions of this case, and this court supports it.

Case: Ji Moumou et al. and Ao Moulan Company's dispute over the collection of unpaid capital contributions, (2023) E 08 Min Zhong 335

Court's judgment: Article 35 of the Enterprise Bankruptcy Law of the People's Republic of China stipulates that "After the people's court accepts the application for bankruptcy, if the contributors of the debtor have not fully fulfilled their capital contribution obligations, the administrator should request the contributors to pay the subscribed capital contributions, regardless of the capital contribution deadline." In this case, the creditor's application for bankruptcy liquidation of Ao Moulan Company has been accepted, and the three shareholders of Ao Moulan Company have all subscribed for capital contributions but have not actually contributed capital. The administrator has determined the collection of partial capital contributions based on the debt claim reporting and the handling of the bankruptcy case, which has factual and legal basis and should be supported.

(3) Selectively suing shareholders with repayment ability

Case: Shanghai Culture Communication Company bankruptcy liquidation case, (2019) Hu 03 Po 208

Court's judgment: The Shanghai Third Intermediate People's Court's (2019) Hu 03 Po 208 ruling on the approval of the reconciliation agreement and termination of the reconciliation procedure - civil ruling, ruled that the draft reconciliation agreement signed and confirmed by Shanghai Culture Communication Company and its shareholder Chu Moumou was passed by the creditors' meeting, and shareholder Chu Moumou has paid all the funds stipulated in the reconciliation agreement to the administrator's bank account, therefore, the reconciliation agreement should be approved and the reconciliation procedure terminated. Accordingly, in accordance with Articles 97 and 98 of the Enterprise Bankruptcy Law of the People's Republic of China, the ruling is as follows: 1. Approve the Shanghai Company reconciliation agreement; 2. Terminate the Shanghai Culture Communication Company reconciliation procedure. The basic content of the reconciliation agreement includes: all debts and bankruptcy expenses totaling xx yuan to be borne by Shanghai Culture Communication Company, to be paid by shareholder Chu Moumou, Chu Moumou should pay all the funds to the administrator's special account before the vote on the draft reconciliation agreement (already fulfilled), and the administrator will distribute the funds after the people's court rules to approve the reconciliation agreement.

In this case, the administrator found that the amount of unpaid capital contributions by the shareholders of Shanghai Culture Communication Company far exceeded the total amount of creditor's claims. If a lawsuit for the full amount of capital contributions was filed, it would result in high litigation costs, and there was no need to collect capital contributions exceeding the total amount of creditor's claims. After research by the administrator and active communication with the creditors, not only was the amount of the lawsuit reduced, but it was also decided to only file capital contribution lawsuits against some shareholders with repayment ability, which also reduced the litigation time cost.

(4) Seeking special handling of litigation fees

1. Apply to the court for per-case collection of litigation fees

Case: Hangzhou Tourism Hygiene Products Company, Chun'an Manufacturing Company administrator, Xu Moumou et al.'s dispute over the collection of unpaid capital contributions, (2019) Zhe 0127 Min Chu 3187

In this case, the plaintiff's litigation request was for the defendant to pay 9,199,999 yuan of unpaid registered capital, but the final case handling fee was 80 yuan.

2. Apply to the court for a postponement of litigation fees

Case No.: Wenzhou Certain Supervision Company, Li Mou, Chi Moumou, etc., Case of Pursuing Unpaid Capital Contributions, (2020) Zhe0381 Min Chu 2515

In the judgment of this case: The case acceptance fee is 46800 yuan (postponed by the plaintiff), reduced by half to 23400 yuan, with the defendant Li Mou bearing 21528 yuan, and the defendant Chi Mou bearing 1872 yuan (the defendants Li Mou and Chi Moumou shall pay to this court within 10 days from the effective date of this judgment).

The above method significantly reduces litigation costs, but whether the court will approve it remains unclear. It involves multiple factors such as legal procedures and judicial discretion, so it is necessary to negotiate with the court to ensure that all conditions and requirements are fully met, thereby obtaining the court's support and approval.

For the unpaid capital contribution claims that have not been successfully executed, according to Articles 111 and 112 of the Enterprise Bankruptcy Law, they can be included in the bankruptcy property liquidation plan. The claims formed by the shareholders' unpaid capital contributions will be included in the bankruptcy property and publicly auctioned. The auction activities can be carried out in accordance with the "Provisions of the Supreme People's Court on Several Issues Concerning Online Judicial Auctions by People's Courts". After the claims are realized and converted into cash, the bankruptcy administrator will then make payments according to the order and proportion stipulated by law.

Case: Case of bankruptcy liquidation of a certain consulting company, (2018) Hu 0109 Po 15

In this case, the administrator of a certain consulting company legally sued two shareholders to pay 400,000 yuan and 3,450,000 yuan in capital contributions to the company. After winning the case, the administrator applied for enforcement but there were no assets available for enforcement. On April 20, 2022, the court issued a civil ruling (2018) Hu 0109 Po 15-2, stating that on April 19, 2022, the administrator submitted an application, stating that according to the property liquidation plan passed by the creditors' meeting, the administrator conducted an online auction of the 400,000 yuan and 3,450,000 yuan claims determined by the No. 21528 civil judgment against the two shareholders respectively. Li Moumou, the bidder, finally won the bid at a price of 65,100 yuan and paid the full price on March 29, 2022. Therefore, the administrator applied for confirmation of the above auction results.