Perspective | Supreme Court Ruling Sets the Tone: A Capital Verification Audit Report Is Not a “Get-Out-of-Jail-Free Card”—All Former Shareholders Who Failed to Actually Contribute Capital Should Be Added as Enforced Parties.

The Supreme People’s Court’s retrial ruling in this case stems from a lawsuit challenging the enforcement of a corporate debt. The basic facts of the case are clear, and the key points of contention are prominent, making it an ideal model for understanding the court’s ruling principles.

Basic Facts of the Case: Shaanxi Pharmaceutical Consulting & Management Co., Ltd. (hereinafter referred to as the “Pharmaceutical Company”) and Chengdu Technology Co., Ltd. (hereinafter referred to as the “Technology Company”) are involved in a debt dispute. A final judgment has ordered the Pharmaceutical Company to fulfill its payment obligations to the Technology Company. During the enforcement proceedings, the Technology Company discovered that the Pharmaceutical Company had no assets available for enforcement and therefore applied to add the Pharmaceutical Company’s former shareholder Nie Moubin, its current shareholder Zhang Moumin, and other shareholders as additional parties subject to enforcement. Upon investigation, it was found that the Pharmaceutical Company was established under a system requiring full paid-up capital contributions. An accounting firm had previously issued a verification report and an audit report, indicating that the former shareholder Nie Moubin had fulfilled his obligation to make the required capital contribution. However, the court further uncovered that the bank account through which the Pharmaceutical Company had received the equity subscription payments from the founding shareholders simply did not exist; thus, Nie Moubin had objectively failed to make any actual capital contribution. In 2016, Zhang Moumin acquired 60% of the Pharmaceutical Company’s equity held by Nie Moubin free of charge and subsequently became the legal representative of the Pharmaceutical Company. Zhang Moumin claimed that when he acquired the equity, he had reviewed the verification report and the business registration documents and had exercised reasonable due diligence, and therefore was unaware of Nie Moubin’s failure to make the capital contribution. He argued that he should not be added as a party subject to enforcement. Both the first-instance and second-instance courts upheld the Technology Company’s claim and ruled to add Nie Moubin, Zhang Moumin, and others as parties subject to enforcement. Dissatisfied with this decision, Zhang Moumin filed a petition for retrial with the Supreme People’s Court.

Supreme People's Court’s Ruling: The central issue in this case is whether it should be presumed that Zhang Min was aware that the original shareholders had failed to fulfill their capital contribution obligations. After review, the Supreme People's Court issued a ruling dismissing Zhang Min’s application for retrial. The key reasons for the ruling can be summarized in three points:

1. The capital verification audit report is not absolute proof of actual capital contribution: Whether shareholders of a limited liability company have actually made their contributions should be determined comprehensively, taking into account factors such as the deposit of monetary contributions into bank accounts, the capital verification certificate, and the certificate of contribution. Relying solely on the capital verification report or the audit report cannot independently establish the fact of actual capital contribution. In this case, the objective fact that the contribution account did not exist directly undermines the probative force of the capital verification report.

2. The equity transferee has a higher duty of due diligence: Zhang Moumin acquired 60% of the equity in the pharmaceutical company and subsequently served as the company’s legal representative. Compared to an ordinary equity transferee, he had a heightened duty of care regarding the original shareholders’ capital contributions. Simply reviewing the formal industrial and commercial registration documents and verification of capital contributions without conducting a substantive investigation does not constitute fulfilling his reasonable duty of review.

3. The fact that Zhang Moumin acquired the equity gratuitously can be presumed to indicate subjective knowledge: Given the circumstances that Zhang Moumin acquired the equity gratuitously and failed to provide a reasonable explanation for the lack of payment, the courts in both the first and second instances presumed that he “knew or should have known” that the original shareholders had failed to fulfill their capital contribution obligations. This presumption is consistent with the law, and the allocation of the burden of proof was appropriate.

The above-mentioned ruling by the Supreme People’s Court does not establish new legal rules; rather, it applies and elaborates on existing provisions of the Company Law, judicial interpretations, and procedural rules for enforcement. Thoroughly examining the relevant legal basis is essential for understanding the ruling’s principles and serves as the legal foundation for asserting rights and bearing responsibilities in practice. The core of the ruling falls within two major systems: the Company Law and its judicial interpretations, as well as the special provisions governing the modification and addition of parties in civil enforcement proceedings. The key articles and application highlights are set forth below:

1. Article 28 of the Company Law (revised in 2005): Shareholders shall pay their respective subscribed capital contributions as stipulated in the company’s articles of association, on time and in full. If a shareholder contributes capital in the form of currency, such currency contribution shall be fully deposited into an account opened by the limited liability company at a bank; if a shareholder contributes non-monetary property, the transfer of property rights shall be carried out in accordance with the law. If a shareholder fails to make the capital contribution as prescribed in the preceding paragraph, in addition to making up the full amount owed to the company, such shareholder shall also bear contractual liability toward those shareholders who have already made their contributions on time and in full. This provision clearly defines the legal obligations of shareholders regarding their actual capital contributions. The core requirement for monetary contributions is “full deposit into the company’s bank account,” which also serves as the key legal basis upon which the court in this case found that the original shareholder had failed to make the required contribution.

2. Article 13, Paragraph 2 of the Third Interpretation of the Company Law: If a company’s creditor requests that shareholders who have failed to fulfill or fully fulfill their capital contribution obligations bear supplementary compensation liability within the scope of the unpaid principal and interest for the portion of the company’s debts that cannot be repaid, the people’s court shall uphold such request. However, if a shareholder who has failed to fulfill or fully fulfill his or her capital contribution obligations has already assumed the aforementioned liability, the people’s court shall not support similar requests made by other creditors. This provision grants company creditors the direct right to claim supplementary compensation liability from shareholders who have failed to make their contributions; it is a key provision that breaks through the principle of the independent legal personality of the corporation and also serves as the substantive legal basis for applying to add shareholders who have failed to make their contributions as judgment debtors.

3. Article 18, Paragraph 1 of the Third Interpretation of the Company Law: If a shareholder of a limited liability company transfers its equity without fulfilling or fully fulfilling its capital contribution obligations, and the transferee knows or should have known about this fact, the people’s court shall support the company’s request that the original shareholder fulfill its capital contribution obligations and hold the transferee jointly and severally liable. Similarly, if a company creditor brings a lawsuit against the original shareholder pursuant to Paragraph 2 of Article 13 of these Provisions and simultaneously requests that the aforementioned transferee bear joint and several liability, the people’s court shall also grant such request. This provision serves as the direct legal basis for the new shareholder’s joint and several liability. The two core requirements are: first, the original shareholder transferred its equity without fulfilling or fully fulfilling its capital contribution obligations; and second, the new shareholder “knew or should have known” about the above-mentioned facts. In this case, the circumstances of Zhang Min precisely meet the conditions for applying this provision.

Article 17: If a for-profit legal person that is the party subject to enforcement has insufficient assets to satisfy the debts determined by an effective legal document, and the applicant for enforcement requests to add or substitute shareholders, investors who have not yet paid their contributions, or promoters who, pursuant to the Company Law, bear joint and several liability for such contributions as parties subject to enforcement, and if these individuals are liable within the scope of their unpaid contributions in accordance with law, the people’s court shall grant such request. This provision constitutes the statutory ground for adding shareholders who have not yet made their contributions as parties subject to enforcement in enforcement proceedings. It clearly stipulates that the prerequisite for such addition is “the company’s assets are insufficient to satisfy the debts,” and the scope of liability is “within the range of unpaid contributions.” This provision serves as a crucial link between substantive law and enforcement procedures.

2. Article 32: If the respondent or applicant disagrees with the execution court’s ruling on modification, addition, or dismissal of an application made pursuant to Paragraph 2 of Article 14 and Articles 17 through 21 of these Provisions, they may file an objection lawsuit against the execution court within fifteen days from the date of service of the ruling. This provision clearly sets forth the relief procedure available to shareholders who have been added as parties—namely, safeguarding their rights through an objection lawsuit against the execution court. In this case, Zhang Moumin’s first-instance, second-instance, and retrial proceedings all followed this relief path.

The Supreme People’s Court’s ruling provides clear responses to common disputes arising in practice concerning shareholder contributions, equity transfers, and enforcement-related additions. By distilling its core judicial rules, we can summarize them into five key points, which not only promote uniformity in judicial practice but also offer clear guidance for the conduct of market entities.

In practice, some shareholders mistakenly believe that obtaining a capital verification report or an audit report issued by an accounting firm automatically fulfills their capital contribution obligations. This is a typical misunderstanding of the evidentiary force of such documents. In this case, the Supreme People’s Court explicitly stated that capital verification reports and audit reports are merely formal documentary evidence, and their probative value can be rebutted by objective facts. When reviewing whether shareholders have actually made their contributions, courts should adhere to the principle of substantive review, comprehensively assessing multiple pieces of evidence—including the authenticity of the contribution accounts, the actual flow of funds contributed, and the issuance of contribution certificates. In this case, the objective fact that the contribution account did not exist directly undermined the probative value of the capital verification report. Even if the report was issued by a legally authorized institution, it cannot serve as a “shield” to absolve shareholders of their failure to make contributions. This rule serves as a reminder to market participants: Verification and audit of capital contributions are not the “end point” of capital contribution; actually fulfilling the obligation to contribute capital is the fundamental requirement.

The phrase “knowing or ought to have known” stipulated in Article 18 of the Third Interpretation of the Company Law is a focal point of controversy in practice. The crux of determining whether this condition is met lies in whether the transferee has fulfilled the “duty of reasonable due diligence.” In this case, the Supreme People’s Court clarified that the duty of reasonable due diligence does not merely entail reviewing formal documents such as business registration records and capital verification reports; rather, it requires the transferee to conduct a substantive investigation—especially in cases where the transferee acquires a substantial equity stake and subsequently assumes the role of the company’s legal representative or senior management. For such transferees, the standard of care required is even higher. Specifically, The transferee shall review the company’s fund transfer records, financial accounting books, certificates of capital contribution, and other original documents to confirm whether the capital contribution has actually been received. If the transferee conducts only a formal review and fails to identify any obvious defects in the capital contribution, the court may presume that the transferee has failed to fulfill its duty of reasonable due diligence and thus determine that the transferee “should have known” about the fact that the capital contribution had not been made.

The consideration paid by a shareholder for acquiring equity interests serves as an important basis for determining the acquirer’s subjective state and is also a key factual element upon which courts rely in practice to presume whether the acquirer was aware of the capital contribution defects. In this case, Zhang Min acquired the equity interest gratuitously and failed to provide a reasonable explanation; accordingly, the court directly presumed that he knew or should have known that the original shareholder had failed to make the required capital contribution. This judicial approach is not an isolated instance but rather a common rule in judicial practice. Moreover, if the transferee acquires the equity interest at a conspicuously unreasonable low price and is unable to provide evidence justifying such a low price, the court may similarly make the same presumption. Conversely, if the transferee acquires the equity interest at a reasonable consideration and has fulfilled his due diligence obligations yet still fails to uncover the capital contribution defects of the original shareholder, he shall not be held jointly liable. This rule reminds equity transferees that the consideration for equity transfers should reflect fair market value; gratuitous or low-priced acquisitions of equity will entail higher legal risks.

The Supreme People’s Court’s ruling clearly delineates the legal risk boundaries for three types of market entities—companies, shareholders, and creditors. Based on the ruling’s principles and practical operational guidelines, these three groups should adopt targeted risk-prevention strategies to avoid getting caught up in legal disputes and safeguard their legitimate rights and interests.

When a company has no assets available for enforcement, creditors should not readily give up their right to protect their interests. Instead, they should conduct a comprehensive investigation to precisely identify the original shareholders who have failed to fulfill their capital contribution obligations as well as any new shareholders who were aware of such failure. Then, they can pursue additional enforcement procedures to recover their debts. Specific operational points:

1. Conduct a comprehensive investigation into shareholders’ capital contributions: Apply to the court for an investigation order to verify the company’s business registration documents, capital verification reports, audit reports, bank account statements, financial accounting books, and other relevant materials. Pay particular attention to the authenticity of the capital contribution accounts and the actual flow of contributed funds, and identify key evidence revealing any defects in the capital contributions.

2. Promptly file an application to add the judgment debtor: Upon obtaining preliminary evidence that shareholders have failed to make their contributions, immediately file a supplementary application with the enforcement court, submit the relevant supporting documents, and clearly identify the entities being added as parties (such as original shareholders or new shareholders) as well as the scope of their respective liabilities.

3. Actively participate in the execution objection lawsuit: If the respondent files a lawsuit objecting to enforcement, the creditor should actively respond to the lawsuit and further provide evidence to prove that the original shareholders did not actually contribute capital, and that the new shareholders knew or should have known about this fact (e.g., acquiring equity gratuitously, acquiring equity at a significantly reduced price, or the new shareholder holding a senior management position in the company), thereby seeking the court’s support.

Both existing and new shareholders should strictly comply with their capital contribution obligations and regulate equity transfer activities to avoid legal liabilities arising from defects in capital contributions. Specific operational guidelines:

1. Original shareholders: Actively fulfill their capital contribution obligations and retain complete evidence of such contributions. Original shareholders shall make their capital contributions in full and on time. For monetary contributions, the funds must be fully deposited into the company’s statutory capital account. For non-monetary contributions, the transfer of property rights must be carried out in accordance with the law, and complete supporting documents—including bank transfer records, certificates of contribution, and proof of property right transfer—must be retained to prevent situations such as false capital accounts or withdrawal of contributed funds. If, due to objective reasons, it is genuinely impossible to make the contribution on time, a resolution passed by the shareholders’ meeting shall be used to amend the articles of association, extend the contribution deadline, and carry out the required industrial and commercial registration changes in accordance with the law.

2. New shareholders: Conduct a substantive review before acquiring equity to avoid taking on defective equity. Before acquiring equity, new shareholders should fulfill their due diligence obligations and avoid merely reviewing formal documents. Specifically, they should verify original supporting documents such as the company’s fund transfer records, financial accounting books, and certificates of capital contribution to confirm that the previous shareholders have indeed made their capital contributions. If any defects in the previous shareholders’ capital contributions are discovered, the new shareholder should refuse to acquire the equity or negotiate with the previous shareholders, requesting them to make up the shortfall before proceeding with the equity transfer. If it is absolutely necessary to acquire equity with defects, the new shareholder should clearly stipulate in the equity transfer agreement the previous shareholders’ capital contribution obligations and liability for breach of contract, and require the previous shareholders to provide collateral to mitigate their own risks.

3. Equity Transfer: Standardize the payment of consideration and retain relevant evidence. The transfer of equity should stipulate a fair consideration, which shall be paid via bank transfer or other similar methods, and the transfer receipt should be retained. If, for special reasons, the equity is to be transferred gratuitously or at a low price, a reasonable written explanation must be provided (e.g., the company is suffering severe losses or the equity has no actual value), and relevant evidence should be retained to prevent the court from presuming that the transferee knowingly accepted an equity with defects.