Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) (Revised in 2014)

Fa Shi [2014] No.2

February 20, 2014

(Adopted at the 1504th meeting of the Judicial Committee of the Supreme People's Court on December 6, 2010 and amended in accordance with the Decision on Amending the Provisions on Several Issues concerning the Application of the Company Law of the People's Republic of China which was adopted at the 1607th meeting of the Judicial Committee of the Supreme People's Court on February 17, 2014)

In order to correctly apply the Company Law of the People's Republic of China (hereinafter referred to as the "Company Law"), in light of judicial trial practices, issues concerning the application of the law by people' courts in hearing disputes over the establishment of companies, capital contribution, confirmation of equity interest and others are hereby prescribed as follows:
　
Article 1 Persons who sign the articles of association, subscribe for capital contribution or shares and perform the duties of corporate establishment for the purpose of establishing a company shall be recognized as the promoters of the company, including shareholders of a limited liability company at the time of its establishment.

　
Article 2 Where promoters enter into contracts with external parties in their own names for the purpose of establishing a company, the relevant people's courts shall uphold the claims of the other parties to the contracts that such promoters shall bear contractual obligations.
Where the company, after establishment, has confirmed the contracts prescribed in the foregoing paragraph or has actually enjoyed the rights or performed the obligations under the contracts, the relevant people's courts shall uphold the claims of the other parties to the contracts that the company shall bear contractual obligations.
　
Article 3 Where promoters enter into contracts with external parties in the name of the company being established, the relevant people's courts shall uphold the claims of the other parties to the contracts that the company shall bear contractual obligations after the company is established.
Where, upon establishment of the company, there is evidence that the promoters enter into contracts with others in the name of the company being established for their own benefits, the relevant people's court shall uphold the claim of the company for bearing no contractual obligations on the basis thereof, unless the other parties to such contracts are bone fide parties.
　
Article 4 Where a company fails to be established due to some reasons, and any creditor claim that all or part of the promoters shall bear joint and several liabilities for paying off the expenses and debts incurred in the establishment of the company, the relevant people's court shall uphold the claim.
Where some promoters, after bearing the liabilities in accordance with the foregoing paragraph, claim that the other promoters shall share the liabilities, the people's court shall order the other promoters to bear liabilities at the agreed proportions of liability bearing; where there is no agreed proportion, such liabilities shall be borne at the agreed proportions of capital contribution; in the absence of agreed proportions of capital contribution, such liabilities shall be borne on an equal basis.
Where the company fails to be established due to the fault of some promoters, and the other promoters claim that such promoters shall bear the expenses and debts incurred in the establishment of the company, the relevant people's court shall determine the scope of liabilities of the parties at fault in light of the actual situations of fault.

　
Article 5 Where the promoters cause damage to any other person due to their performance of duties for company establishment, and the victim claim that the company shall bear the liability of tort compensation after the establishment of the company, the relevant people's court shall uphold the claim; where the company fails to be established, and the victim claim that all promoters shall bear joint and several liabilities for compensation, the relevant people's court shall uphold the claim.
The company or promoters not at fault may, after making compensation, recover the compensation from the promoters at fault.
　
Article 6 Where a subscriber of a joint stock company fails to make due payment for the shares subscribed for on time and still fails to make such payment within a reasonable period after being urged by the promoters of the company, and the promoters offer such shares to other persons, the relevant people's court shall hold such offering of shares valid. Where a share subscriber delays in paying for share subscription and causes losses to the company, and the company claims that the subscriber shall be liable for compensation, the relevant people's court shall uphold the claim.
　
Article 7 Where a capital contributor makes contribution with property of which it/he has no right to dispose, and the parties concerned have dispute over the validity of the act of contribution, the relevant people's court may determine the case with reference to the provisions of Article 106 of the Real Rights Law.
Where equity interest is obtained with contribution made with monies earned from illegal acts or crimes such as corruption, bribery, encroachment or misappropriation, the equity interest shall be disposed of by way of auction or sale when the illegal acts or crimes are investigated and penalized.
　
Article 8 Where a capital contributor makes contribution with the right to use allocated land or the land subject to encumbrances, and the company, any other shareholder or any creditor of the company claims that such contributor has not fulfilled its obligation of contribution, the relevant people's court shall order the contributor to handle formalities for alteration of the land-use right or lift the encumbrances on such land within a specified and reasonable time limit; in case of failure to do so by the prescribed deadline, the people's court shall hold that the contributor has not fully performed its obligation of contribution in accordance with the law.
　
Article 9 Where a capital contributor makes contribution with non-monetary assets whose value has not been evaluated in accordance with the law, and the company, any other shareholder or any creditor of the company claims that such contributor has not fulfilled its obligation of contribution, the people's court shall entrust a valuation agency with lawful qualifications to appraise the value of such assets. In the event that the amount of value determined by such appraisal is apparently lower than the amount of value specified in the articles of association of the company, the people's court shall hold that the contributor has not fully performed its obligation of contribution in accordance with the law.
　
Article 10 Where a capital contributor who makes contribution with real estates, land-use right, intellectual property rights subject to title registration or other assets has delivered the same to the company for use but has not gone through the formalities for change of ownership, and the company, any other shareholder or any creditor of the company claims that such contributor has not fulfilled its obligation of contribution, the relevant people's court shall order the contributor to handle the formalities for change of ownership within a specified and reasonable time limit; where the formalities for change of ownership are handled within the said time limit, the people's court shall hold that such contributor has fulfilled its obligation of contribution, and the people's court shall uphold the claim, if any, by the contributor for corresponding shareholders' rights from the time when it actually delivers the assets to the company for use.
Where a capital contributor who makes contribution with assets prescribed in the foregoing paragraph has handled the formalities for change of ownership but has not delivered the same to the company for use, and the company or other shareholders claim that the contributor shall deliver the said assets to the company and that the contributor shall not enjoy corresponding shareholders' rights prior to actual delivery, the people's court shall uphold such claims.
　
Article 11 Where a capital contributor makes contribution with its equity in other companies, the relevant people's court shall hold that the contributor has fulfilled its obligation of contribution if the following conditions are satisfied:
1. the equity contributed is legally owned and may be transferred by the capital contributor in accordance with the law;
2. the equity contributed is clear of any defects on title or encumbrances;
3. the contributor has undergone the statutory procedures for transfer of such equity; and
4. the value of the equity contributed has been legally appraised.
In the event that the contribution made with equity fails to satisfy Item 1, Item 2 or Item 3 of the foregoing paragraph, and the company, any other shareholder or any creditor of the company claims that such contributor has not fulfilled its obligation of contribution, the people's court shall order the contributor to take remedial actions within a specified and reasonable time limit so as to satisfy the above conditions; in the case of failure to take remedial actions by the prescribed deadline, the people's court shall hold that the contributor has not fully performed its obligation of contribution in accordance with the law.
In the event that the contribution made with equity fails to satisfy Item 4 of the Paragraph 1 hereof, and the company, any other shareholder or any creditor of the company claims that such contributor has not fulfilled its obligation of contribution, the people's court shall handle the case in accordance with Article 9 hereof.
　
Article 12 Where, after the company is established, the company, any shareholder or any creditor of the company claims that a relevant shareholder has withdrawn capital contributed on the ground that acts of the shareholder conform to any of the following circumstances and injure the interests of the company, the people's court shall sustain:
1. prepares false financial statements to increase non-existing profits and distribute the same;
2. remits out the capital it contributed by making up false credit-debt relations;
3. remits out the capital it contributed through related-party transactions; or
4. any other acts that withdraws the capital without legal procedures.

　
Article 13 Where any shareholder fails to fulfill or fully fulfill its obligation of capital contribution, and the company or any other shareholder claim that said shareholder should fully fulfill its obligation of capital contribution to the company in accordance with the law, the people's court shall sustain.
Where any creditor of the company claims that the shareholder who has not fulfilled or fully fulfilled its obligation of capital contribution should bear supplementary compensation liability to the extent of capital not contributed and the interest thereon for the part of debts of the company which the company is unable to repay, the people's court shall sustain; in the event the shareholder who has not fulfilled or fully fulfilled its obligation of capital contribution has borne foregoing liability, and other creditors file same claims, the people's court shall not sustain.
In the event a shareholder has not fulfilled or fully fulfilled its obligation of capital contribution when the company is being established, a plaintiff who files a lawsuit in accordance with Paragraph 1 or 2 hereof claim that the promoters of the company and the sued shareholder should bear joint and several liabilities, the people's court shall sustain; after the promoters bear corresponding liabilities, they may recover from the sued shareholder.
In the event a shareholder has not fulfilled or fully fulfilled its obligation of capital contribution when the company increases it share capital, a plaintiff who files a lawsuit in accordance with Paragraph 1 or 2 hereof claim that directors or senior management who fail to fulfill their obligations specified in Paragraph 1 of Article 147 of the Company Law, making the capital contribution not fully paid, should bear corresponding responsibility, the people's court shall sustain; after the directors and senior management concerned bear corresponding responsibilities, they may recover from the sued shareholder.
　
Article 14 Where any shareholder withdraws the capital it contributes, and the company or other shareholders claim that the said shareholder should return such capital and interest thereon and other shareholders, directors, senior management or actual controllers who assist the said shareholder in withdrawing capital should bear joint and several liability therefor, the people's court shall sustain.
Where any creditor of the company claims that the shareholder who withdraws contributed capital should bear supplementary compensation liability to the extent of capital withdrawn and the interest thereon for the part of debts of the company that the company is unable to repay, and that other shareholders, directors, senior management or actual controllers who assist said shareholder in withdrawing capital should bear joint and several liability therefor, the people's court shall sustain; in the event the shareholder who withdraws capital has borne foregoing liability, and any other creditor files the same claim, the people's court shall not sustain.

　
Article 15 Where any contributor makes capital contribution with legal non-monetary properties whose value depreciates by reasons of market change or other objective factors, and the company, any other shareholder or any creditor of the company claims that the said contributor should supplement the capital, the people's court shall not sustain, unless otherwise agreed by the parties concerned .

　
Article 16 Where a shareholder fails to fulfill or fully fulfill its obligation of capital contribution or withdraws its capital, the company reasonably sets corresponding restrictions in accordance with the articles of association or resolutions of the general meeting on its right to claim for distribution of profits, preemptive right to subscribe new shares, right to claim for distribution of remaining properties and other shareholder rights, and the shareholder deems such restrictions invalid, the people's court shall not sustain.
　
Article 17 Where any shareholder of a limited liability company fails to fulfill its obligation of capital contribution or fully withdraws its capital and fails to pay or return such capital within a reasonable time limit after being urged by the company to do the same, the company disqualify it for the capacity as a shareholder by resolutions of the general meeting, and the shareholder claims that such disqualification should be invalid, the people's court shall not sustain.
Under the circumstance prescribed above, the people's court shall set out in its judgment that the company shall handle legal procedures for capital reduction or that other shareholders or third parties shall pay corresponding capital. Where, before legal procedures for capital reduction are handled or other shareholders or third parties pays corresponding capital, any creditor of the company claims that parties concerned should bear corresponding responsibilities in accordance with Article 13 or 14 hereof, the people's court shall sustain.
　
Article 18 Where any shareholder of a limited liability company transfers its equity without fulfilling or fully fulfilling its obligation of capital contribution and the transferee is aware of or should be aware of such fact, and the company claims that the shareholder should fulfill its obligation of capital contribution and the transferee should bear joint and several liability therefor, the people's court shall sustain; where any creditor of the company sue the said shareholder in accordance with Paragraph 2 of Article 13 hereof and claims that the said transferee should bear joint and several liability therefor, the people's court shall sustain.
After the transferee bears liability in accordance with provisions of the foregoing paragraph and recovers from the shareholder who fails to fulfill or fully fulfill its obligation of capital contribution, the people's court shall sustain, unless otherwise agreed by the parties concerned.
　
Article 19 Where any shareholder of the company fails to fulfill or fully fulfill its obligation of capital contribution or withdraws its capital, the company or other shareholders claim that such shareholder should fully perform its obligation of capital contribution or return the capital, and the shareholder being sued defenses on the ground of limitation of action, the people's court shall not sustain.
Where the limitation of action for the rights of creditors of the company has not expired, the creditors claim that a shareholder who fails to fulfill or fully fulfill its obligation of capital contribution or withdraws its capital should bear responsibility of compensation in accordance with the provision of Paragraph 2 of Article 13 and Paragraph 2 of Article 14 hereof, and the shareholder being sued defenses on the ground that the limitation of action for its obligation of capital contribution or return of capital has expired, the people's court shall not sustain.

　
Article 20 In the event parties concerned have disputes over whether the obligation of capital contribution has been fulfilled, and the plaintiff produce evidence proving the reasonable doubt over the performance of capital contribution obligation by the shareholder, the shareholder being sued shall have the burden of proof for its performance of the capital contribution obligation.
　
Article 21 Where a party file a lawsuit with the people's court for confirmation of its shareholder qualification, the company shall participate in the litigation as the defendant with the parties having interests in the equity in question as the third party.
　
Article 22 Where parties concerned have disputes over the title to equity, and one party requests the people' s court to confirm its title to the equity, such party shall prove any of the following facts:
1. it has legally made capital contribution or subscribed capital contribution to the company and is not in violation of the compulsory provisions of laws and regulations; or
2. it has been transferred equity of the company or has become successor of the same by other means and is not in violation of the compulsory provisions of the laws and regulations.
　
Article 23 After a party concerned legally fulfills its obligation of capital contribution or legally obtains equity through succession, the company fails to issue to it a certificate of capital contribution, record it into the shareholder register or handle registration formalities with the company registration authority in accordance with Articles 31 and 32 of the Company Law, and the said party claims that the company should perform the foregoing obligations, the people's court shall sustain.
　
Article 24 Where the real capital contributor and the nominal capital contributor of a limited liability company enter into a contract, agreeing that the real capital contributor shall make capital contribution and enjoy investment rights and interests and the nominal capital contributor shall be the nominal shareholder, and the real capital contributor and the nominal capital contributor have dispute over the validity of the contract, the people's court shall hold the contract valid in the event no circumstance specified in Article 52 of the Contract Law occurs.
Where the real capital contributor and the nominal shareholder prescribed in the foregoing paragraph have dispute over the title to investment rights and interests, and the real capital contributor claims rights against the nominal shareholder on the ground that it has actually fulfilled the obligation of capital contribution, the people's court shall sustain; in the event the nominal shareholder deny the rights of the real capital contributor by reasons of record of the company shareholder register or registration of the company registration authority, the people's court shall not sustain.
Where the real capital contributor, without consent of majority of other shareholders of the company, claim that the company should alter its shareholders, issue a capital contribution certificate, record it into the shareholder register or record it into the articles of association or handle registration with the company registration authority, the people's court shall not sustain.
　
Article 25 Where the nominal shareholder transfers, pledges or otherwise disposes of the equity registered under its name and the real capital contributor deems such disposal of equity invalid on the ground that it has actual rights to the equity, the people's court may handle the case in accordance with the provisions of Article 106 of the Real Rights Law mutatis mutandis.
Where the equity transfer by the nominal shareholder causes losses to the real capital contributor, and the real capital contributor claims that the nominal shareholder should bear responsibility of compensation, the people's court shall sustain.
　
Article 26 Where any creditor of the company claims that the shareholder registered with the company registration authority should bear supplementary compensation liability to the extent of capital not contributed and the interest thereon for the part of debts of the company which the company is unable to repay, on the ground that such shareholder has not fulfilled its obligation of capital contribution, and the said shareholder defenses on the ground that it is merely a nominal shareholder rather than the real capital contributor, the people's court shall not sustain.
Where the nominal shareholder, after bearing the compensation responsibility in accordance with provisions of the foregoing paragraph, claims to recover from the real capital contributor, the people's court shall sustain.
　
Article 27 Where alteration of registration has not been handled with the company registration authority after an equity transfer, the original shareholder transfers, pledges or otherwise disposes of the equity still registered under its name, and the transferee shareholder deems such disposal of equity invalid on the ground that it has actual rights to the equity, the people's court may handle the case in accordance with the provisions of Article 106 of the Real Rights Law mutatis mutandis.
Where the disposal of equity by the original shareholder causes losses to the transferee shareholders, the transferee shareholder claims against the original shareholder for compensation and the directors, senior management or actual controllers who have fault in failure to handle alteration of registration in time should bear corresponding responsibilities, the people's court shall sustain. In the event the said transferee shareholder has fault in failure to handle alteration of registration in time, the responsibilities of said directors, senior management or actual controllers may be properly mitigated.
　
Article 28 Anyone who makes capital contribution in the name of any other person without the latter's authorization and register the name of such other person as a shareholder with the company registration authority shall bear corresponding responsibilities. Where the company, any other shareholder or any creditor of the company claims that the said shareholder falsely registered as a shareholder should bear responsibilities for making up the capital or compensating the part of debts which the company is unable to repay, the people's court shall not sustain.