Meaning
Regulatory clause within the Company Law of the People’s Republic of China that governs the distribution of profits to shareholders. Dividends may only be paid from after-tax profits remaining after the company covers losses and contributes to the mandatory statutory reserve fund. If company law article 211 is violated by distributing profits before these obligations are met, shareholders must return the funds to the company.
Statutory Reserve
Allocation of ten percent of the annual after-tax profit to the statutory common reserve remains mandatory until the fund reaches fifty percent of the registered capital. These funds provide a buffer for future losses or capital expansion.
Liability Enforcement
Executives who approve illicit distributions face personal liability for the amount wrongfully paid out. Legal action initiated by creditors or other shareholders can compel the restoration of the company’s capital base.
Shareholder Obligation
Repayment of distributed amounts occurs regardless of whether the recipient acted in good faith or possessed knowledge of the financial shortfall. When a company fails to meet the mandatory reserve threshold, any dividends paid to shareholders are considered a return of capital that must be restored to the corporate accounts to protect the interests of external creditors. The law prioritizes the maintenance of the capital base.
Recovery of these funds ensures that the legal priority of debt holders remains intact during insolvency proceedings.
