Since the company's registered capital was changed from the paid-in system to the subscribed system, shareholders often ignored the arrangement of paid-in capital contributions in the early stage of operating the company. Once the company's operations require costs, shareholders may take the form of advance funds, loans, and other forms to transfer the funds to the company's account, and later return the loan funds through reimbursement or repayment. Once in and out, it becomes a routine operation to transfer funds in and out. However, if financial treatment is not carried out in accordance with legal financial systems, it is likely to create hidden dangers for shareholders who need to supplement and bear the company's external debts.

Through searching recent judicial precedents, the author found that when reviewing the issue of whether shareholders have actually paid in their registered capital, courts pay particular attention to examining whether "the transfer of capital contributions belongs to a fictitious creditor's debt relationship" and "whether the repayment of shareholder's debt complies with legal procedures", which requires shareholders to bear a heavier burden of proof for "the company has a true creditor's debt relationship with it.", There should be a complete chain of evidence to prove that the transferred funds are actually repaying the debt according to law. This practice is also in line with the legal provisions of Article 20 of the 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), which states that if there is a dispute between the parties as to whether or not they have fulfilled their capital contribution obligations, and the plaintiff provides evidence that reasonably doubts the shareholders' performance of their capital contribution obligations, the defendant shareholders shall bear the burden of proof regarding their performance of their capital contribution obligations.

The following is intended to introduce several cases of enforcement objection litigation that are often identified as non paid-in capital contributions. The main reason for this is that shareholders are unable to prove the true existence of their claims and debts due to failure to follow sound financial systems. Of course, although the measures taken by shareholders are different, they cannot ultimately escape the responsibility of supplementary repayment of the company's debts.

Basic information

A technology limited company in Beijing (hereinafter referred to as "the company") was applied for labor arbitration by multiple employees due to unpaid wages. After that, the arbitration institution issued effective legal documents. However, due to the company's loss status and lack of actual payment ability, the employees were unable to apply for compulsory enforcement. During the execution process, it was found that there was no property available under the company's name for execution. As the executor of the application, the employee learned through the application for access to the company's industrial and commercial archives that the shareholders A, B, C, and D respectively subscribed for 51%, 21%, 20%, and 8% of the company's registered capital, and the investment period was as of 2035. During the execution process, the employee applied for additional shareholders A, B, and C to be the subject of the execution case, and then the execution court made a ruling rejecting the employee's additional request. Since then, employees have filed three enforcement objections to the court, requesting the court to order that shareholders A, B, and C be added to the original enforcement case, requiring them to bear joint and several liabilities.

This series of cases has been tried by two levels of courts, respectively supporting the employees' requests for additional shareholders A, B, and C to be executed, and ruling that each shareholder should bear additional compensation responsibilities within the scope of their unpaid registered capital determined by the court.

As a result, shareholders A, B, and C all assume supplementary liability for compensation. However, due to internal conflicts between shareholders, there has been a long history. In fact, the way in which subscribed and paid in capital is handled in the early stage is quite different.

Shareholder A: As a major shareholder of the company, I have paid a number of expenses for the company in the early business process. In the first instance lawsuit, shareholder A submitted a screenshot of the company's financial accounting software page and bank vouchers to prove its investment in the company. At the same time, before a labor dispute case between an employee and the company has been filed with a birth certificate, the shareholder A made multiple operations by first making a payment to the company's account (note: investment funds) and then transferring the amount to the account of the shareholder A (note: reimbursement funds). Shareholder A claims to transfer funds to Party A's account in the name of reimbursement, which is used to repay upfront expenses such as software maintenance, taxes, and rent advanced. During the second instance, the shareholder A submitted additional evidence such as the company's business contract, bank transfer records, housing lease contracts, and loan slips, further asserting that he has repeatedly advanced funds for the company and has the right to request the company to repay them, and asserting that receiving compensation in the form of reimbursement within this amount does not constitute a flight, and that the reimbursement does not hinder the fact that he has actually completed his investment.

Shareholder B: As the legal representative of the company, he once provided loans to the company during the early business process. In the first instance lawsuit, shareholder B submitted the company's bank receipt and historical transaction details of the bank account to prove that the amount transferred to the company has reached the subscribed capital contribution. Shareholder B claims that the reason for remitting capital contributions into the company in multiple installments is that they currently have no money, and can only be transferred out by first remitting part of the funds to the company, and then repaying its previous borrowings by the company (Note: Repayment of borrowings), and then remitting part of the funds to the company (Note: Investment funds), circulating back and forth. During the second instance, the shareholder B supplemented the submission of the company's financial statements, capital verification reports (only for the capital contribution process of shareholders B and D, not including the capital contribution process of shareholder A), records of loans made to the company, handwritten records of company loan receipts, and records of loans returned by the company to the shareholder B, and other evidence, asserting that the company has been losing money, while the shareholder B has actually paid in the capital contribution, and that the company has a creditor's debt relationship with it, The funds remitted into the company's account were transferred out because the company repaid its borrowings and submitted its business information to prove that it had paid in capital.

Shareholder C: As a minority shareholder of the company, I rarely participate in the actual operation of the company, have little understanding of the company's situation, and have not made any capital contributions or contributed funds to the company before executing the objection lawsuit.

Judgment result

In the employee's enforcement objection lawsuit against shareholder A, in addition to the capital transfer records and reimbursement vouchers, shareholder A also submitted the company's copyright certificate and other materials to prove that the company still has property rights for enforcement, which does not belong to the situation of bankruptcy but not bankruptcy, and the shareholder should not be pursued as the person to be enforced. After the first and second trials of the case, the court held that although the shareholder A provided the records of his transfer to the company, he also acknowledged the fact that he obtained the payment in the form of reimbursement. At the same time, shareholder A, as 51% of the controlling shareholder, actually operated the company, and provided only reimbursement vouchers for a period of time, without providing complete reimbursement vouchers and bank statements for his period as a shareholder of the company. Such evidence cannot yet prove the completeness of the funds he received from the company during his period as a shareholder, nor the source of his capital contributions. Based on all the evidence provided by shareholder A, it is impossible to prove that they have completed their capital contributions to the company.

In the employee's enforcement objection lawsuit against shareholder B, the court held that the annual report of the company was a matter that the company declared on its own. As the legal representative of the company, Party B had the ability to control the company's declared annual report on its own, so it should bear further burden of proof for its paid-in capital contributions. In response to the behavior of shareholder B transferring in and out in multiple rounds in the name of investment accounts, the court held that even if the company actually owes debt to shareholder B, it should be repaid through legal procedures, rather than being handled by shareholders using convenient conditions to manipulate the company's account. In addition, the creditor's rights between the employee and the company have been determined by an effective document before Party B transfers them. If Party B is aware of the company's debt paying ability and the property is insufficient to pay off all the debts, the employee's salary has a priority over ordinary creditor's rights in accordance with the law. After learning of the debt, Party B enters it into the company's account and transfers it out to its own account, which is suspected of evading execution. The court ultimately made a negative evaluation of such capital contributions and did not accept Party B's claim that the capital contributions had been paid in.

In the employee's enforcement objection lawsuit against shareholder C, due to C's failure to submit evidence of its paid-in capital contributions, the focus of controversy in the second instance of the case focused on whether shareholder C's subscription period should be accelerated.

In the above-mentioned cases, all three shareholders were determined to have not completed their paid-in capital contributions. At the same time, based on the provisions of the Minutes of the Civil and Commercial Trial Work Meeting of the National Court of Justice (hereinafter referred to as the "Minutes of the Ninth People's Court") regarding "whether shareholder capital contributions should be accelerated to maturity", The current view held by most courts is that "under the registered capital subscription system, shareholders enjoy term benefits in accordance with the law. Creditors who request shareholders who have not reached the term of their capital contributions to assume additional liability for compensation for the company's debts that cannot be repaid within the scope of their capital contributions on the grounds that the company cannot repay its debts as they fall due, are not supported by the people's court. However, the following exceptions are: (1) In a case where the company is the person to be enforced, the people's court exhausted the enforcement measures and had no property to enforce, and there were already bankruptcy reasons, but did not apply for bankruptcy; (2) "After the company's debts are incurred, the company's shareholders' (general meeting) resolution or other means extend the term of shareholders' capital contributions.". Due to the fact that the relevant creditor's rights involved in the case have been enforced by the people's court and cannot repay the debts, it should be determined that the company obviously lacks the solvency and has already had the reasons for bankruptcy. In the event that the company has not filed for bankruptcy, employees, as creditors, have the right to request shareholders who have not reached the deadline for making capital contributions to bear supplementary liability for compensation for debts that the company cannot repay within the scope of their capital contributions. Therefore, the court finally ordered the three shareholders to be added as executors, respectively bearing supplementary compensation responsibilities for the company's debts within the scope of their unpaid registered capital.

The three shareholders of the company took different measures to respond to their paid-in capital contributions, especially the shareholders A and B, who adopted the method of transferring in and out immediately. However, without exception, all of them were ultimately given a negative evaluation by the court and deemed not to have completed their paid-in capital contributions. During the daily operation process of the company, shareholders A and B have both advanced funds for the company, and there are real creditor's rights and debt transactions. However, due to their inability to provide complete transaction records during their tenure as shareholders and retain evidence such as original vouchers, it is further difficult for them to provide evidence in the enforcement objection lawsuit. In addition, from the perspective of shareholder B's engagement with a third party for capital verification, a capital verification report alone cannot provide shareholders with a reassurance. When reviewing the factual part, the court usually combines various evidences to determine whether the shareholder has truly fulfilled its capital contribution obligations and whether there is a suspicion of withdrawing capital.

As for shareholder A's attempts to prove that the company still has property, while shareholder B's attempts to prove that the company has been losing money, this involves multiple considerations such as differences between shareholders and the existence of a lawsuit to dissolve the company. I will not go into too much detail here.

Practical recommendations

Due to the fact that many cases involving companies as the subject of enforcement can only end in the final version, based on the release of the "Nine People's Minutes", more and more creditors have begun to attempt to further safeguard their rights through the procedure of enforcement objection - enforcement objection litigation, and the court's review and adjudication tendency towards the liability of shareholders for additional unpaid capital contributions has become increasingly clear. In view of this, it is recommended that shareholders take precautions and make arrangements for their paid-in capital contributions in advance to avoid any additional liability for external debts of the company in the future. The author also puts forward several suggestions based on judicial practice experience in order to provide inspiration for shareholders to prevent and isolate risks:

1. Distinguish between advance payment and actual payment, and plan in advance. If the company needs to supplement start-up funds during its early operation, it is recommended that shareholders give priority to injecting funds into the company in the form of investment funds, while avoiding subsequent distribution through the production of false financial accounting statements that falsely increase profits, transferring their capital contributions out through fictitious creditor's rights and debt relationships, using related party transactions to transfer their capital contributions out, or withdrawing their capital contributions in other forms, to prevent being identified as withdrawing capital contributions. In the case of advances, it is recommended to standardize the procedures and keep original documents such as contracts, payment instructions, and transfer vouchers for backup to prove that the transfer of funds is based on a true creditor's debt relationship.

2. For shareholders who have paid in their capital contributions, litigation measures can be taken to promptly pursue the responsibility of shareholders who have not paid in their capital contributions. If any shareholder of the company has paid in his/her capital contribution, but other shareholders have evaded his/her capital contribution, failed to fulfill or failed to fully fulfill his/her capital contribution obligations, the shareholder who has paid in his/her capital contribution may, in accordance with the relevant provisions of the Company Law of the People's Republic of China and the 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), promptly pursue the shareholder who has not fulfilled his/her capital contribution obligations in accordance with the law and other shareholders who have assisted in evading his/her capital contribution Responsibilities of relevant personnel such as directors, senior managers, or actual controllers. If the shareholder who has paid in the capital contribution is a minority shareholder of the company and does not have access to the company's accounting books, information on the other party's capital contribution, etc., they can simultaneously try to cooperate with the right to know litigation and request the company to provide relevant information to jointly contain the other party through multiple litigation cases. It should be noted that according to current jurisprudence, some courts hold that "accounting books do not include accounting documents," and on this basis, order that shareholders' litigation requests for access to accounting documents, including original documents, are not supported. If there is a need for such litigation, a decision can be made after further studying the jurisprudence of the local competent court.

If necessary, if existing debts are properly handled, capital reduction can be handled in a timely manner in accordance with legal procedures. If the registered capital of a limited company at the time of its establishment is relatively high, shareholders can form resolutions and handle capital reduction procedures based on business needs in the later stage. In the event of serious losses, in order to avoid further expansion of shareholder losses, the company should also promptly handle capital reduction procedures to prepare for possible future measures such as cancellation.

(This article is translated by software translator for reference only.)