Perspective | An Analysis of the Liability for Shareholders Who Transfer Equity Before the Expiry of Their Capital Contribution Period

Before revising the Company Law, our country’s companies... Registered Capital System The company operates under a subscribed capital system, meaning that when establishing the company, shareholders only need to commit to contributing a certain amount of capital—no actual payment is required at the time of incorporation. As for the timing of actual payment, shareholders may freely agree upon it, and such agreement must be recorded in the company’s articles of association. Under this arrangement, the issue of contribution deadlines becomes particularly salient, and the concept of “contribution deadline benefits” is thereby reinforced within the realm of corporate law. The period between the date on which shareholders commit to contributing capital and the agreed-upon deadline for making the actual payment constitutes the contribution deadline. As long as the contribution deadline has not yet expired, shareholders are, in principle, not obligated to make their contributions. During this period, neither the company nor its creditors can demand that shareholders make their contributions or hold them liable for compensation. This is precisely the contribution deadline benefit enjoyed by shareholders within the specified deadline. Regarding the transfer of equity interests, both the old and new Company Laws impose only procedural restrictions and requirements on the transfer process itself; they do not treat the contribution deadline or whether the capital has been actually paid in as one of the limiting factors or requirements for equity transfers. In other words, equity transfers are not subject to any restrictions based on the contribution deadline or whether the capital has been fully paid in.

If the subscription period has not yet expired, shareholders are not yet required to make their full capital contributions. In such cases, if a shareholder transfers his or her equity interest, does he or she still bear responsibility? The new Company Law provides clear guidance on this issue. Article 88 of the newly revised Company Law, which came into effect on July 1, 2024, stipulates: If a shareholder transfers equity interests for which the subscribed capital has been paid up but the subscription period has not yet expired, the transferee shall assume the obligation to pay up the subscribed capital. If the transferee fails to pay up the full amount of the subscribed capital within the prescribed time limit, the transferor shall bear supplementary liability for the unpaid portion of the subscribed capital that the transferee has failed to pay. Meanwhile, Article 4 of the “Several Provisions of the Supreme People’s Court on the Temporal Effect of Applying the Company Law of the People’s Republic of China” specifies that the new Company Law applies retroactively. As a result, courts across the country have been applying this provision in their adjudication work. Many former shareholders who had already transferred their equity interests have suddenly found themselves embroiled in litigation and held liable, thus triggering a wave of “old-account” lawsuits over the transfer of existing equity interests. To address the issue of excessively broad scope of liability, the Supreme People’s Court issued and implemented on December 24, 2024, the “Reply Concerning the Non-Retroactive Application of Paragraph 1 of Article 88 of the Company Law of the People’s Republic of China,” clarifying that Paragraph 1 of Article 88 of the Company Law of the People’s Republic of China, effective from July 1, 2024, applies only to equity transfers occurring after July 1, 2024, where the subscription period has not yet expired. For disputes over capital contribution liabilities arising from equity transfers made by shareholders before July 1, 2024, when the subscription period had not yet expired, people’s courts shall handle such cases fairly and justly in accordance with the spirit of the original Company Law and other relevant legal provisions.

Following the Supreme People’s Court’s suspension of the retroactive application of Article 88, Paragraph 1 of the new Company Law, disputes arising from equity transfers with unexpired capital contribution deadlines prior to July 1, 2024, may be resolved by referring to the case law applicable at that time.

For example, in Case No. 6423 of the Supreme People's Court’s Civil Application (2021), the Supreme Court held that, pursuant to Article 28, Paragraph 1 of the Company Law of the People’s Republic of China (2006 edition)—which stipulates that “shareholders shall pay their respective subscribed capital contributions in full and on time as specified in the company’s articles of association”—before the expiration of the subscription period, shareholders enjoy a statutory benefit of time. Therefore, failure by shareholders to pay or fully pay their subscribed capital contributions within the subscription period does not constitute a failure to perform or incomplete performance of their capital contribution obligations. A shareholder who transfers equity before the expiration of the subscription period is not liable for the company’s debts that cannot be repaid within the scope of unpaid principal and interest, unless the shareholder acted with malicious intent to evade capital contribution obligations by transferring the equity, or unless there are exceptional circumstances such as setting an excessively long subscription period while making no actual contribution at all despite a relatively low registered capital. In this case, prior to the transfer of equity from Yiyue Energy Investment Company to Yiyue Investment Company and Taixing Real Estate Company on June 25, 2008, Yiyue Energy Company had already confirmed that the deadline for shareholders’ payment of their subscribed capital contributions was September 30, 2008. At the time when Yiyue Energy Investment Company transferred all its equity, the subscription period for the subscribed capital contributions had not yet expired. The equity transfer by Yiyue Energy Investment Company to Yiyue Investment Company and Taixing Real Estate Company was approved by the sixth shareholders’ (directors’) meeting resolution of Yiyue Energy Company and completed the industrial and commercial registration change on July 14 of the same year; thus, the equity transfer was carried out in strict compliance with the law. Moreover, at the time of the equity transfer on June 25, 2008, Yiyue Energy Company was still operating normally, and the construction contract signed between Dehou Company and Yiyue Energy Company was also being performed as usual. At the time when the construction contract was signed with Dehou Company and when Yiyue Energy Investment Company transferred its equity, Yiyue Energy Company’s registered capital of 133.2 million yuan had already been fully paid up. It should therefore be recognized that Yiyue Energy Investment Company did not have any subjective intention to evade debts, nor did it engage in any malicious behavior aimed at avoiding the company’s debt repayment obligations. Consequently, Yiyue Energy Investment Company is not liable for the debts of Yiyue Energy Company within the scope of unpaid principal and interest.

Meanwhile, to address the issue of liability following the transfer of equity interests whose subscription periods had not yet expired as of July 1, 2024, the Supreme People's Court Case Database on December 27, 2024, added in one go four reference cases concerning such disputes: 2024-08-2-527-001 (the dispute over objections to enforcement involving Han Mou'e and three others against Yao, a certain logistics company, and others), 2024-08-2-527-002 (the case of Lu Mougang and Cao Mou against Shen, Pan Mouli, and Yang Mouqiong regarding objections to enforcement), 2024-08-2-277-003 (the dispute over liability for harming the interests of the company’s creditors involving Tang Moujian, Jiang Mousheng, and Jiang Mouhua against Chen Mouxiang and a certain bedding company’s shareholders), and 2024-08-2-277-004 (the dispute over liability for harming the interests of the company’s creditors involving a certain leasing company and Zhang Mouchuan and other shareholders). These cases also offer valuable insights into potential solutions.

In the dispute case No. 2024-08-2-527-001 involving Han Mou'e and three others versus Yao Mou and a certain logistics company, the Third Intermediate People's Court of Beijing held that when Yao Mou transferred the equity to Wu Mouping, the deadline for his subscribed capital contribution had not yet expired. However, Han Mou'e and others had already filed a lawsuit with the court demanding that the logistics company compensate them for their losses. As a shareholder of the logistics company, Yao Mou should have been fully aware of the company’s assets, liabilities, and its ability to repay debts. Yao Mou’s subscribed capital contribution was 900,000 yuan, yet he transferred the equity to Wu Mouping at zero consideration—a transfer that clearly defies common sense. Moreover, Yao Mou failed to provide any evidence to substantiate the delivery of the company’s official seal, business license, or assets. Wu Mouping claimed to be a recipient of minimum living allowance with no source of income; he was diagnosed with bladder cancer as early as 2017. The enforcement ruling also stated that Wu Mouping did not own any real estate, vehicles, securities, or housing provident fund accounts. Therefore, Wu Mouping lacked both the financial capacity to make the required capital contributions and the operational capability to manage the company. Considering all these factors, the People’s Court determined that at the time of the equity transfer involved in this case, Yao Mou was well aware that the company had external debts and was already being sued. Nevertheless, he transferred all the company’s equity to Wu Mouping—at zero consideration—despite knowing full well that Wu Mouping clearly lacked the financial means to make any capital contributions. By taking advantage of the benefit afforded by the shareholders’ subscription period, Yao Mou maliciously evaded the company’s debts and thereby infringed upon the interests of the company’s creditors. Consequently, the court ruled that Yao Mou should bear supplementary compensation liability for the company’s debts.

In the case of Lu Mougang, Cao Mou, and Shen Mou versus Shen Mou, Pan Mouli, and Yang Mouqiong—litigation concerning objections to enforcement actions (Case No. 2024-08-2-527-002)—the Third Intermediate People’s Court of Beijing held that the transfer of equity from Shen Mou and Pan Mouli to Dong Moutao involved numerous unreasonable aspects. First, considering the timing of the equity transfer, at the time when Shen Mou and Pan Mouli transferred their equity to Dong Moutao, the creditor had already filed a lawsuit with the court demanding that Xingxing Company repay its debts. As shareholders and operators of Xingxing Company, Shen Mou and Pan Mouli should have been fully aware of the company’s assets, liabilities, and repayment capacity. Their transfer of equity during the litigation period makes it difficult to characterize their actions as bona fide. Second, examining the equity transfer process itself, both Shen Mou and Pan Mouli transferred their equity to Dong Moutao for a price of only 1,000 yuan each. This transfer price not only failed to correspond to their respective capital contribution ratios but also appeared virtually gratuitous when compared to their subscribed capital contributions. Third, Shen Mou and Pan Mouli acknowledged that they had not handed over the company’s financial statements or balance sheets to Dong Moutao, nor did they provide any evidence to demonstrate that the company’s official seal, business license, or assets had been properly delivered. Fourth, Dong Moutao stated that he was completely unaware of the equity transfer. He had been introduced by someone to help register the company and had paid a fee of 800 yuan for this service. He had even reported the incident to the police, requesting the cancellation of the registration change. Before acquiring all of Xingxing Company’s equity, Dong Moutao himself had already accumulated an outstanding national student loan debt of 9,300 yuan, plus interest, which he had failed to repay for many years. Thus, it is difficult to conclude that Dong Moutao possessed the financial capability to make the required capital contributions. Taking into account the above factors, the court determined that Shen Mou and Pan Mouli’s transfer of equity to Dong Moutao was conducted in bad faith, aimed at evading debt and infringing upon the interests of the company’s creditors. Shen Mou and Pan Mouli engaged in malicious equity transfers and abused their rights. Shareholders' time preference The conduct in question should be rejected. A shareholder whose contribution period has not yet expired transferred his equity interest while fully aware that the company had outstanding external debts and was unable to repay them. This equity transfer clearly does not conform to the characteristics of a normal commercial transaction, and the transferee demonstrably lacks the ability to fulfill the obligation to make the required capital contribution. Such a transfer harms the interests of the company’s creditors and should not be afforded legal protection. Shen and Pan Li shall bear supplementary compensation liability for the company’s debts within the scope of their subscribed capital contributions.

In the dispute case No. 2024-08-2-277-003 involving Tang Moujian, Jiang Mousheng, and Jiang Mouhua versus Chen Muxiang and a certain Bed Products Co., Ltd. concerning liability for harming the interests of the company’s creditors, the Second People’s Court of Dongguan City, Guangdong Province, held that Tang Moujian, Jiang Mousheng, and Jiang Mouhua had not fully subscribed for their capital contributions to the company; rather, they had already made actual payments totaling RMB 690,000, RMB 690,000, and RMB 2,590,000, respectively. Before and after the transfer of equity by Tang Moujian, Jiang Mousheng, and Jiang Mouhua, Chen Muxiang and the certain Bed Products Co., Ltd. engaged in multiple transactions successively. Prior to the equity transfer, the transactions between the certain Bed Products Co., Ltd. and Chen Muxiang were performed normally. The creditor has provided no evidence to show that, at the time of the equity transfer, the certain Bed Products Co., Ltd. was facing a severe business crisis. After the equity transfer, the certain Bed Products Co., Ltd. continued to make payments for goods to Chen Muxiang, and the creditor has provided no evidence to prove that the transferee, Li Mousheng, clearly lacked the ability to fulfill his capital contribution obligations or the capacity to run the business. Considering the above factors comprehensively, it can be determined that during the period when the certain Bed Products Co., Ltd. was operating normally, Tang Moujian, Jiang Mousheng, and Jiang Mouhua transferred the equity in question, and their corresponding capital contribution obligations were thereby transferred together to the transferee, Li Mousheng. This case involves an equity transfer among shareholders and does not exempt the transferee, Li Mousheng, from his capital contribution obligations. Furthermore, since the creditor did not assert its rights against the transferee shareholder, Li Mousheng, but instead directly demanded that the transferors, Tang Moujian, Jiang Mousheng, and Jiang Mouhua, bear compensation liability for the unpaid capital contributions of the certain Bed Products Co., Ltd., such a claim violates the principle of good faith. As the creditor has failed to submit any evidence proving that Tang Moujian, Jiang Mousheng, and Jiang Mouhua maliciously transferred the equity to evade their capital contribution obligations, their claim should be dismissed.

In the dispute case No. 2024-08-2-277-004 involving a leasing company and shareholders Zhang Chuan et al. concerning their liability for harming the interests of the company’s creditors, the Intermediate People’s Court of Zhengzhou City, Henan Province, held that on November 22, 2017, Zhang Chuan transferred his 20% and 30% equity interests respectively to Zhang Feng and Zhang Qiang. Both Zhang Feng and Zhang Qiang voluntarily accepted these shares along with the corresponding creditor rights and debts. Henceforth, Zhang Chuan no longer held the status of a shareholder in the relevant industrial company. At the time of the equity transfer, the amount of the company’s creditor rights and debts had not yet been determined; moreover, after the equity transfer, the industrial company had already settled all rental arrears owed to the leasing company. Therefore, when Zhang Chuan transferred his equity, the industrial company still retained the ability to pay, and Zhang Chuan did not abuse his shareholder rights by using the equity transfer as a means to evade the rental payments owed in 2017. Furthermore, Zhang Chuan’s capital contribution was a subscribed contribution, entitling him to the benefit of a specified term. The existing evidence is insufficient to prove that, at the time of the equity transfer, Zhang Chuan abused the company’s subscribed capital system or misused his shareholder rights by evading his capital contribution obligations through the equity transfer, thereby harming the interests of the leasing company as a creditor of the industrial company. Consequently, Zhang Chuan should not be held liable.

From the cases mentioned above, we can conclude that for disputes over capital contribution liability arising from the transfer of equity before the new Company Law took effect on July 1, 2024—due to shareholders failing to meet the deadline for their capital contributions—the transferring shareholder’s liability should be determined in accordance with the spirit of the original Company Law and other relevant legal provisions. In the course of adjudication, people’s courts will comprehensively consider factors such as the company’s debt situation at the time of equity transfer, its ability to repay debts, the specifics of the transfer transaction, the financial status of the transferee, and the transferee’s capacity to make capital contributions. If the court finds that the transferring shareholder knowingly transferred equity to a transferee who was clearly incapable of making the required capital contribution, despite the company’s existing external debts and inability to repay them, such transfer would be deemed a malicious attempt to evade debt and harm the interests of the company’s creditors. In such cases, the transferring shareholder should bear supplementary compensation liability for the company’s debts. On the other hand, if the people’s court, after a comprehensive assessment of all relevant factors at the time of equity transfer, determines that the company was operating normally and had the ability to repay its debts, and that the transferee also possessed the necessary financial capacity to make the required capital contribution, and further concludes that the transferring shareholder did not act with the malicious intent to evade their capital contribution obligations, then the transferring shareholder shall not be held liable.

The transfer of equity interests by shareholders that have not yet fully paid their capital contributions does not automatically result in exemption from liability. If the deadline for making the capital contribution has already passed and the contribution remains unpaid, the transfer of equity itself will not reduce the shareholder’s liability in any way, nor will it produce any legal effect of liability waiver. However, if the deadline for making the capital contribution has not yet expired, the situation will depend on whether there are problems with the timing of the equity transfer and the transaction itself. If the transfer occurred before July 1, 2024, and is found to have been carried out maliciously with the intent of evading the shareholder’s obligations, the original shareholder will still be held liable. But if the transfer occurred after July 1, 2024, according to the provisions of the new Company Law, the original shareholder will naturally bear supplementary liability for the unpaid capital contributions made by the transferee.