How to Deal With the New Capital Contribution Requirement under the new PRC Company Law
The amended PRC Company Law (“New Company Law”) will officially come into effect on July 1, 2024.? During the past 6 months, we have been repeatedly asked about the impact of the New Company Law, especially Article 47 of the New Company Law, which provides for a maximum permissible period of 5 years for the capital contribution of limited liability companies (including both foreign-invested and non-foreign-invested limited liability companies) (“LLCs”). This 5-year capital contribution requirement has caught many LLCs cold handed, mainly for those whose capital contribution periods are longer than 5 years, or those whose registered capital is too high to pay up within 5 years. With the New Company Law officially coming into effect, this article provides for a brief overview of the 5-year capital contribution period with the aim to address the concerns of investors.
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The New Company Law makes it clear in Article 266 that for LLCs established before July 1, 2024, the capital contribution period can be gradually adjusted to comply with the New Company Law.? According to the Regulation of State Council on the Implementation of the Capital Registration and Management in the Company Law (“Capital Contribution Regulation”), a three-year transition period (i.e., from July 1, 2024 to June 30, 2027) (the “Transition Period”), will be granted for LLCs registered prior to July 1, 2024.?
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According to the New Company Law, for LLCs established on or after July 1, 2024, their registered capital shall be paid up within five years from the date of incorporation of the LLCs, while for existing LLCs established before July 1, 2024, the longest period to pay up the registered capital shall be 5 years after the expiration of the aforementioned Transition Period, i.e., June 30, 2032. With that being said, an existing LLC will be required to adjust its capital contribution schedule only if its full capital contribution date is set beyond June 30, 2032.
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According to Article 228 of the New Company Law, when an LLC increases its registered capital, the capital contribution schedule of the newly increased capital shall comply with the relevant provisions applicable for the establishment of an LLC, which means in case of a capital increase on or after the implementation of the New Company Law, the LLCs need to fully contribute the increased capital within 5 years after the registration of capital increase.
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For LLCs whose registered capital amounts are too high to pay up within the above-mentioned 8-year statutory period in total, they may consider reducing the unpaid capital, and the Capital Contribution Regulation introduces a simplified capital reduction procedure for LLCs established prior to July 1, 2024.
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According to the Capital Contribution Regulation, if an LLC established before July 1, 2024 applies for reduction of its unpaid capital during the Transition Period, the LLC may make a public announcement in the National Enterprise Credit Information Publicity System for 20 days (as opposed to 45 days for normal capital reduction procedure), provided that all the following conditions are met:
(i)??????????? there are no outstanding debts or the debts that are significantly lower than the LLC’s paid-in capital;
(ii)????????? all shareholders undertake to assume joint and several liability, within the scope of their original subscribed capital, for the LLC’s debts that arise before the capital reduction; and
(iii)??????? all directors undertake not to jeopardize the LLC’s ability to repay its debts and continuously carry out business operation.
If no creditor raises any objection during the 20-day announcement period, the LLC may register the capital reduction with the application documents and commitment letter after the expiry of the announcement period.
Based on the above, although the New Company Law imposes stricter requirements on capital contribution schedule, there is still plenty of time for concerned LLCs and their investors to make proper arrangements to either reduce the unpaid capital before June 30, 2027 or make full contribution before June 30, 2032.?