Capital Subscription Compliance Rules under Revised PRC Company Law
Revised PRC Company Law caps capital subscription schedules at five years, enforcing strict director audit duties, equity forfeiture, and creditor acceleration.
Article 88 Equity Transfer Liability
Meaning
Embedded within Chinese corporate legislation, statutory rules governing unpaid capital allocations assign secondary payment duties to former equity holders who transfer uncalled registered capital. Statutory provisions establish joint liability mechanisms between sellers and buyers of company equity shares when capital contribution deadlines mature without payment. Under an Article 88 equity transfer liability claim, a transferor who assigns unpaid registered capital remains secondary liable if the transferee fails to pay the capital contribution on time.
The rule shifts primary payment obligations to the current equity holder while retaining statutory recourse against the selling party. Where a transferee knows or should know that the transferred equity carried deficient funding, both parties incur joint liability for the outstanding capital deficit.
Transferor Exposure
Sellers of registered capital equity remain exposed to cash calls long after completing corporate ownership transfers. Prior legal frameworks permitted equity owners to exit corporate structures and avoid capital commitments by transferring unpaid shares to shell entities. An Article 88 equity transfer liability structure prevents bad faith exits by creating enduring statutory obligations for former equity holders.
If the purchasing party defaults on capital payments upon statutory maturity, corporate creditors can demand full monetary settlement directly from the original seller. Former owners can seek financial indemnification from the buyer only after satisfying corporate or creditor claims.
Transferee Obligation
Acquisition parties must conduct thorough legal and financial due diligence on unpaid corporate capital before signing share purchase agreements. Buying equity that carries future contribution requirements places primary responsibility on the incoming shareholder to fund corporate bank accounts. Application of Article 88 equity transfer liability ensures that incoming shareholders cannot cite ignorance of registration filings to escape capital commitments.
Purchasing parties who accept equity with knowledge of existing contribution defaults share immediate joint payment duties with the transferor.
Legal Remedy
Creditors and corporate entities possess statutory rights to file judicial enforcement actions against both current and former equity holders. Claims can be filed jointly or sequentially against original transferors and acquiring parties depending on insolvency status. Article 88 equity transfer liability permits court orders forcing payment into corporate bank accounts to satisfy valid enterprise debts.
Structuring Foreign Investment Holdings to Satisfy Revised Five Year Capital Commitments
Revised PRC Company Law mandates 5-year capital contribution schedules; foreign holdings must restructure equity terms, utilize debt conversions, or execute reductions.