Perspective | Practical Operational Boundaries of Directors' Liability for Forfeiture Due to Failure to Call for Payment Under Article 52 of the New Company Law

Article 51 of the Company Law of the People's Republic of China stipulates that, after a limited liability company is established, the board of directors shall verify the capital contributions made by shareholders. If it is discovered that a shareholder has failed to pay the full amount of the contribution specified in the company's articles of incorporation on time, the company must issue a written notice to that shareholder, formally urging them to make the outstanding payment.

Directors who fail to fulfill the obligations stipulated in the preceding paragraph in a timely manner and thereby cause losses to the company shall be liable for compensation.

Article 52 of the Company Law of the People's Republic of China stipulates that if a shareholder fails to contribute capital by the date specified in the company's articles of association, the company may issue a written notice urging payment, as prescribed in Paragraph 1 of the preceding article. This notice may specify a grace period for making the capital contribution; however, the grace period shall not be shorter than 60 days from the date the company issues the notice. If, upon expiration of the grace period, the shareholder still has not fulfilled the capital contribution obligation, the company, following a resolution passed by the board of directors, may issue a notice of forfeiture to that shareholder. Such notice must be delivered in writing. From the date the notice is issued, the shareholder shall lose all equity interests corresponding to the unpaid capital contribution.

According to the provisions of the preceding paragraph, any equity lost shall be transferred in accordance with the law, or the registered capital shall be reduced accordingly and the equity canceled. If the transfer or cancellation is not completed within six months, the company's other shareholders shall fully contribute their respective capital contributions in proportion to their original investments.

Shareholders who object to the forfeiture shall file a lawsuit with the People's Court within thirty days from the date of receiving the forfeiture notice.

Article 53 of the Company Law of the People's Republic of China stipulates that, after a company is established, shareholders shall not withdraw their capital contributions.

Those who violate the provisions of the preceding paragraph shall return the misappropriated capital contributions; and if such violation causes losses to the company, the directors, supervisors, and senior management personnel who bear responsibility shall jointly and severally indemnify the company along with the shareholder involved.

Article 191 of the Company Law of the People's Republic of China stipulates that if directors or senior management personnel cause damage to others while performing their duties, the company shall bear the liability for compensation. Additionally, directors and senior management personnel who act with intent or gross negligence shall also be held liable for compensation.

The new Article 51 of the Company Law explicitly assigns the duties of verification and collection to the "Board of Directors," but in practice, it’s important to remain flexible in identifying the appropriate entity. In limited liability companies that do not have a board of directors, Article 75 of the new Company Law stipulates: "For limited liability companies that are small in scale or have a small number of shareholders, a board of directors may not be established; instead, a single director can be appointed to exercise the powers normally vested in the board under this law. Such a director may concurrently serve as the company’s manager." As a result, certain functions of the board—such as the obligation to collect outstanding payments—can naturally fall to this executive director. Similarly, these provisions apply to joint-stock companies under Article 51, requiring their boards of directors to fulfill identical responsibilities.

The phrase "directors who bear responsibility" in the statute reflects the case-by-case, differentiated nature of accountability.

Conditions for liability exemption: Directors who reasonably rely on third-party professional reports, such as capital verification reports or audit reports, and have fulfilled their formal review obligations may, in practice, have room for exemption from liability.

Responsibility Allocation Rules: It is necessary to comprehensively consider factors such as the directors' attendance, voting positions (e.g., opposed/abstained/absent), and their official duties and responsibilities (such as the special duty of care expected of financial directors), in order to avoid applying a "one-size-fits-all" approach to accountability.

The behavior of directors violating their obligation to call for payment primarily manifests as continuous passive inaction, and specific determination must follow the three-element requirement of "conduct + fault + causal relationship."

A dynamic monitoring mechanism for shareholder contributions has not been established;

Failure to initiate a notice-to-pay procedure after discovering funding defects;

The debt collection procedure has significant flaws.

The criteria for assessing the duty of diligence exhibit a combination of subjective and objective characteristics:

Objective standard: Based on the level of care expected of a "reasonable and prudent manager," reflecting the typical management standards among companies in the same industry.

Subjective criteria: When evaluating directors' professional knowledge, experience background, and current positions, the requirements for external directors are typically lower than those for internal directors.

When directors consistently allow shareholders' defective capital contributions to persist, resulting in escalating losses for the company, the doctrine of joint causation applies, holding that the directors' inaction, combined with the shareholders' failure to contribute capital, constitutes a complex causal link. For instance, in Case No. (2018) Supreme People's Court Min Re 366, the court determined that the shareholder's failure—specifically, Company某某—to fully pay its capital contribution had directly harmed the interests of Shenzhen某某 Company. Meanwhile, six directors, including Hu某某, neglected their duties and passively allowed the ongoing damage to continue. As a result, the court concluded that "the directors' inaction, coupled with the shareholder's unpaid contribution, jointly led to the occurrence of the company's losses."

Directors may assert an exemption defense under specific circumstances, but they must bear a strict burden of proof, which primarily includes:

1. Categorization of Statutory Defenses

Company solvency defense: The company's asset-to-liability ratio is below 30%, and there are no significant debt disputes.

Shareholder's objective inability to perform defense: The shareholder has entered bankruptcy proceedings, or their principal assets have been subject to compulsory enforcement.

Business Judgment Rule Protection: Suspension of collection efforts based on sound business decisions.

2. Rules for Allocation of Burden of Proof

Positive evidence required: Directors must bear the burden of proof regarding their fulfillment of due diligence obligations, and are required to submit direct evidence such as board resolutions, demand letters, and mailing receipts.

Negative evidence by rebuttal: Shareholder bank statements and asset investigation records demonstrate that losses could not be avoided even with collection efforts.

The initiation of the disqualification procedure requires the simultaneous fulfillment of both substantive and procedural prerequisites.

In terms of substantive requirements, shareholders have failed to fulfill their capital contribution obligations within the time limits stipulated by the company's articles of association. Specifically, this includes three typical scenarios: failure to make the full contribution by the deadline, underpayment of the required amount, and withdrawal of contributed capital. Regarding disputes where the valuation of non-monetary assets significantly exceeds their actual worth, practical approaches tend to apply the rules governing undercapitalization. However, such determinations must be made comprehensively, taking into account professional appraisal reports as well as confirmation of the valuation results through shareholder resolutions.

In terms of procedural requirements, the company must strictly fulfill its obligation to issue a prior notice, sending a written demand notice to shareholders with defective contributions. This notice must clearly specify the exact contribution obligations as well as the corresponding legal consequences.

The operation of the disqualification procedure must strictly follow statutory steps and formal requirements; otherwise, procedural defects could render the notice of disqualification invalid.

Step 1: Written Demand for Payment

The company (as executed by the Board of Directors) shall issue a written demand notice to shareholders with defective capital contributions, clearly specifying the type and amount of unpaid contributions, as well as the grace period (not less than 60 days). The notice must also highlight the risk of forfeiture if the payment is not made within the specified deadline. To ensure effective delivery, it is recommended to use multiple methods (e.g., mail, email, public announcement) and to retain evidence of delivery.

Step 2: Board Resolution

If shareholders still fail to make payment by the end of the grace period, the company must issue a notice of forfeiture after obtaining approval through a resolution passed by the Board of Directors. During the resolution process, directors appointed by the shareholder being urged to pay should recuse themselves from voting to ensure procedural fairness.

Step 3: Issue a Notice of Disqualification

The notice of loss of equity rights must be issued in writing and will take effect from the date of issuance, without requiring shareholders to sign for receipt or provide confirmation. The notice should clearly specify the proportion of equity rights the shareholder has lost, as well as the corresponding capital contribution amount.

Step 4: Equity Disposal

Lost equity interests must be handled within six months through either transfer or capital reduction and cancellation. If no action is taken by the deadline, other shareholders will be required to contribute their respective shares in proportion to their original investments.

Shareholders' right to object is a critical safeguard for procedural fairness. If shareholders disagree with the loss of their rights, they may file a lawsuit in court within 30 days from the date of receiving the notice. In principle, the litigation does not affect the validity of the rights loss during this period; however, shareholders may apply for interim measures to temporarily halt the disposition of their equity interests.

The determination of directors' liability adopts a differentiated accountability principle. For corporate liability, the general negligence principle applies: as stipulated in Article 51 of the Company Law, "Directors who fail to fulfill the obligations prescribed in the preceding paragraph in a timely manner and thereby cause losses to the company shall bear compensation liability." In this case, mere failure to promptly perform the duty of urging payment—resulting in corporate losses—is sufficient to trigger liability, without requiring proof of subjective intent or gross negligence. For creditor liability, however, a negligence-limited principle is applied: according to Article 191 of the Company Law, "If directors or senior management personnel cause harm to others while performing their duties, the company shall bear compensation liability; yet, if such directors or senior managers act with intent or gross negligence, they themselves shall also be held liable for compensation." Thus, liability for creditor losses arises only when the harm is directly caused by intentional misconduct or gross negligence on the part of the directors or senior executives. By adopting this differentiated approach to directors' liability, the system strikes a balance between the company's legal personality and the personal accountability of individual directors.

The scope of compensation follows a standard that prioritizes direct losses, with indirect losses considered only in exceptional cases. Direct losses are limited to the unpaid capital and interest owed by shareholders—for instance, in case No. (2018) Supreme People's Court Min Re 366, the court ruled that six directors were jointly liable for compensating $4.91 million due to their failure to promptly demand payment of shareholders' contributions. On the other hand, indirect losses require rigorous proof of a clear causal link; mere assertion of normal business risks cannot automatically attribute such losses to a breach of the directors' duty of diligence. Instead, substantial evidence must be provided to establish a direct connection between the failure to act and the resulting harm. For example, in case No. (2017) Yue 03 Min Zhong 14642, the court emphasized that while corporate operations inherently carry risks, it would be unreasonable to hold the directors solely responsible for all adverse business outcomes stemming from inadequate diligence.

Directors may claim liability relief through the following channels:

Causation Defense: Demonstrate that the collection effort has no necessary connection to the occurrence of losses—for example, by providing proof of shareholders' creditworthiness or presenting written evidence of refusal to perform—thus confirming that even timely collection efforts may still fail to secure the required capital contributions. This defense must be evaluated comprehensively, taking into account factors such as the contribution deadline stipulated in the company's articles of incorporation and the shareholders' ability to fulfill their obligations.

Joint Responsibility Sharing Mechanism: Directors who assume responsibility may seek reimbursement from the shareholder at fault. This rule applies to The Smarte Case The Supreme People's Court has confirmed that a second correction in responsibility allocation has been achieved.

Protection under the Business Judgment Rule: Decisions made by directors based on reasonable business judgment may qualify for liability exemption, provided they can be demonstrated to meet the following criteria: good faith, a solid information basis, and consideration of the company's best interests.

Charter Autonomy Provisions: According to the authorization under the Company Law, responsibilities may be reasonably limited through the company's articles of association, but the duty of due diligence cannot be completely excluded. Any limitation clauses must be approved by a special resolution of the shareholders' meeting and shall not violate public order and good morals.