Background of the case

At the time of its establishment, Company A had a registered capital of 60 million, including nine shareholders, Company B (holding 20% of the shares) and Company C (holding 10% of the shares). Before the establishment of Company A, nine shareholders fully contributed 60 million yuan of registered capital through external parties, and immediately transferred the registered capital back to the external parties after its establishment. Afterwards, Company C entered bankruptcy liquidation proceedings, and 10% of the equity of Company A under its name was ruled by the court to belong to the buyer, Company D. After acquiring the equity, Company D filed a lawsuit with the Minhang District Court in Shanghai, demanding that Company B return its investment of 6 million yuan to Company A. The Minhang District Court in Shanghai ruled that only honest shareholders can claim that shareholders who have withdrawn their capital can return their capital, and rejected D Company's lawsuit request. D Company appealed and the Shanghai First Intermediate People's Court revised its judgment to support D Company's lawsuit request. Case excerpt from (2021) Hu 01 Min Zhong No. 14513.

Controversy Focus

1. Do shareholders engage in embezzlement of capital contributions?

2. Do defective shareholders have the right to demand that shareholders who have withdrawn their capital return it?

Referee gist

Controversy Focus 1:

The act of shareholders using a third party to advance their capital and withdraw their capital without going through legal procedures falls under the circumstances stipulated in Article 12, Paragraph 1, Item (4) 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)" (hereinafter referred to as "Judicial Interpretation III of the Company Law"), and constitutes capital withdrawal.

Controversy Focus 2:

Even if the acquired equity has defects, D company, as a shareholder, still has the right to request B company, the shareholder who withdrew the capital, to return all the capital to A company (deducting the amount of money that B company has already been executed and deducted by the court for withdrawing the capital to repay B company's external debts).

The reasons are as follows: Firstly, the law does not explicitly stipulate that other shareholders referred to in Article 14 of Judicial Interpretation III of the Company Law should be limited to compliant shareholders. From the perspective of promoting the capital enrichment of the company, shareholders who have withdrawn their capital or acquired defective equity should not be excluded from requesting other shareholders who have withdrawn their capital to return the capital and interest to the company under this provision. Filing a shareholder contribution lawsuit against shareholders who have failed to fulfill their capital contribution obligations or have withdrawn their contributions is a right granted by law to other shareholders. Restricting the qualifications of other shareholders in this article is inconsistent with the company's capital system.

Secondly, all shareholders have the obligation to contribute capital to the company, which is not treated as payment between shareholders. No shareholder may refuse to fulfill their own contribution obligation on the grounds that the other party has not fulfilled the contribution obligation, or has withdrawn the contribution or acquired defective equity.

Thirdly, the withdrawal of capital by shareholders infringes upon the property rights and interests of the company, and the exercise of the shareholder's right to request capital contribution belongs to the category of common interests. Moreover, from the perspective of maintaining company capital, it is beneficial for shareholders who have not fulfilled their capital contribution obligations or have withdrawn their contributions to urge each other to contribute, which is conducive to enriching the company's capital.

Fourthly, the shareholder's obligation to contribute capital is statutory, and the maintenance of company capital is the basis for shareholders to assume limited liability. The lack of company capital will obviously reduce the company's ability to fulfill obligations and repay debts, so it should not be exempted by the company's will.

Legal Interpretation

Regarding the determination of capital withdrawal behavior:

Timely and full payment of subscribed capital is a legal obligation of shareholders, a basic requirement for maintaining the company's capital, and a need to protect the legitimate rights and interests of other shareholders who have made full contributions and creditors of the company. The withdrawal of capital contributions by shareholders not only violates the company's capital system, but also undermines the fairness basis for shareholders to assume limited liability. Its purpose is often to use the company's independent legal personality system to evade debts.

One of the constituent elements for assuming responsibility for embezzlement is the existence of embezzlement behavior. Regarding the manifestation of capital withdrawal behavior, Article 12 of Interpretation III of the Company Law stipulates that "after the establishment of a company, if the company, shareholders or creditors request to recognize the shareholder's withdrawal of capital on the grounds that the relevant shareholder's behavior meets one of the following circumstances and damages the company's rights and interests, the people's court shall support: (1) making false financial and accounting statements to artificially increase profits for distribution; (2) transferring the shareholder's capital contribution through fictitious creditor debtor relationships; (3) using related party transactions to transfer the capital contribution; (4) other behaviors of withdrawing the capital contribution without legal procedures".

In judicial practice, the flow of funds or the fact of fund transfer after capital contribution or completion of capital verification can generally be verified through objective vouchers such as bank statements. There is little controversy, but often the most controversial issue is how to determine the nature of the fund transfer behavior. Defendant shareholders often defend themselves with loans or normal transactions. The court usually considers that shareholders, without any legitimate reasons, have transferred all their subscribed capital without any resolution of the company, and have not returned it or paid any interest, excluding the possibility of other basic legal relationships that should be recognized as capital withdrawal. Therefore, in the absence of basic legal relationships, such as loan agreements, debt collection notices, and other documents proving the authenticity of the creditor's rights, the original shareholders may be deemed by the court to constitute a reasonable suspicion of "capital withdrawal".

In addition, the act of shareholders transferring investment funds or capital increase funds into the company's account for capital verification and withdrawing them without going through legal procedures may also be considered as "capital withdrawal"; Shareholders who provide false enterprise balance sheets, profit and loss statements, and fictitious purchase and sale contracts, with their affiliated companies as the drawer, may be deemed as withdrawing capital when processing bank acceptance bills at financial institutions; Shareholders who inject funds after transferring their registered capital but cannot prove that they are making up for their contributions; The consideration that the transferee of equity or debt should pay, which is indirectly paid by the transferor company and leads to an improper reduction in the company's legal person's assets, may be considered as a withdrawal of capital.

The essence of withdrawing capital is to damage the rights and interests of the company. Although the law does not clearly define what damages the rights and interests of the company, shareholders maliciously violate the principle of capital maintenance, resulting in the inability to repay the company's debts, which naturally damages the company's rights and interests. In short, to determine whether a certain behavior constitutes capital withdrawal, it can be comprehensively analyzed based on the factor of whether it damages the company's rights and interests, combined with the subjective purpose of the actor, the degree of fault, the impact on the company, such as causing a significant reduction in the company's capital, the inability to repay debts, and the evidence provided by both parties. It is not appropriate to generalize all behaviors of shareholders improperly obtaining property from the company as capital withdrawal. In cases where there is a significant dispute over whether it constitutes a withdrawal of capital and the authenticity is unclear, the court may also allocate the burden of proof in accordance with Article 20 of Interpretation III of the Company Law, which states that "if there is a dispute between the parties regarding whether the capital contribution obligation has been fulfilled, and the plaintiff provides reasonable doubt evidence about the shareholder's performance of the capital contribution obligation, the defendant shareholder shall bear the burden of proof for its performance of the capital contribution obligation

Regarding the scope of capital withdrawal:

The Company Law and relevant judicial interpretations have not responded to whether the term "capital contribution" in the prohibition of shareholders from "withdrawing capital" only refers to "registered capital" or includes "capital reserve fund" composed of share premium. There are still different views in theory and practice. Article 47 of the new Company Law stipulates: "The registered capital of a limited liability company is the amount of capital subscribed by all shareholders registered with the company registration authority. The subscribed capital amount of this part is the shareholder's obligation to contribute capital, and there is no dispute about it. In practice, the more controversial issue is whether the premium capital increase entering the capital reserve belongs to the scope of "contribution" extracted from the capital.

One viewpoint is that capital reserves also belong to company assets, and if they are transferred out without justifiable reasons and not returned, it should be considered as a withdrawal of capital contributions. For example, in the case of the capital increase dispute between Yinjiene Carbon New Materials Group Co., Ltd. and Lianyungang Ligang Rare Earth Industry Co., Ltd. [Case No.: (2018) Supreme People's Court Final No. 393], the Supreme People's Court believes that the capital reserve is not only a component of the owner's equity of the enterprise, but also an important part of the company's assets. The company's assets largely represent the company's creditworthiness, debt paying ability, and development ability, and play an important role in safeguarding the interests of creditors, ensuring the normal development of the company, and maintaining transaction safety. As a corporate legal person, a company has independent personality and independent property, and independent property is the material basis of independent personality. Shareholders who contribute capital may claim ownership rights in accordance with the provisions of the articles of association or agreements, but they are not allowed to withdraw their capital without justifiable reasons, which may infringe upon the company's property rights. The Supreme Court believes that the portion included in the capital reserve fund belongs to the company's assets and should be returned after being transferred out without justifiable reasons. In case No. 226 of 2013, the Supreme Court held that the actual capital contribution of shareholders exceeded the capital premium formed by the payable capital contribution, which is essentially a capital reserve fund of the company and does not constitute a loan from shareholders to the company. Shareholders who use this as a loan debt to offset their debts with the company constitute a disguised withdrawal of capital contribution, which violates the principle of capital adequacy of the company and should be deemed invalid. In the case of Su Min Zhong No. 1446 (2019), the court held that although the difference greater than the registered capital was not registered as registered capital in the industrial and commercial department, the company's capital reserve fund cannot be withdrawn at will. The content of the commitment letter involved in the case stipulates that the company shall return to shareholders the investment amount greater than the registered capital, which violates the principle of capital maintenance under the Company Law and damages the legitimate rights and interests of the company and its creditors, and should be deemed invalid.

Another viewpoint is that capital reserves do not fall within the scope of capital contributions. The shareholder's obligation to contribute capital is limited to the portion included in the registered capital, and the portion included in the capital reserve does not constitute paid in capital. The valuation premium is the consideration agreed upon between the investor and the original shareholders of the company to obtain the agreed proportion of equity. Belonging to a contractual act, the obligations arising from it are contractual obligations, which involve the purchase price of a certain proportion of equity by the parties to the contract, and only involve the interests of the original shareholders and new investors. This investment is not a statutory obligation, nor does it involve the protection of the company's creditors, nor does it involve the joint and several obligation of other shareholders to make up for it. Investors can agree with shareholders that they may obtain a contractually agreed proportion of equity without paying a premium. Moreover, the premium included in the capital reserve is only a reserve for the registered capital, and shareholders should not have the space to completely lose their autonomy over it. The capital reserve formed by the premium can still decide whether to convert it into registered capital, how much to convert it into registered capital, and when to convert it into registered capital in the future.

In case (2020) Shaanminzhong 633, the second instance court held that the capital reserve fund is the appreciation caused by the invested capital itself, and has no direct relationship with the company's production and operation. It is a quasi capital or reserve fund of the company, which belongs to the company's assets and is a component of the owner's equity of the enterprise. It can be converted into registered capital according to legal procedures. Therefore, the nature of the capital reserve fund is significantly different from that of the company's registered capital, and it cannot be equated with the company's registered capital. The resolution made by the company in accordance with legal procedures to reduce the capital reserve fund cannot be recognized as capital withdrawal.

There are also opinions that suggest:

The law should protect the capital trust before investment and the asset trust after investment. The portion of unpaid capital before investment should be included in the capital reserve. As it is not the actual property of the company, it generally does not affect the judgment of external parties. At this time, the registered capital in the business license is considered a public commitment, and the contribution is limited to the registered capital and does not need to include unrealized creditor's rights against shareholders; It is necessary to regulate the rules of equal contribution for paid up capital reserves, which constitute company assets and affect the judgment of external traders.

Legal responsibility for withdrawing capital:

As an act that infringes on the property rights of a company, its legal liability shall be subject to the provisions of Article 179 of the Civil Code on civil liability and the second paragraph of Article 53 of the new Company Law, which states: "If a shareholder violates the provisions of the preceding paragraph, they shall return the capital they have withdrawn; if they cause losses to the company, the responsible directors, supervisors, and senior management personnel shall bear joint and several liability with the shareholder." In addition to the aforementioned civil liability, they may also face administrative liability or even criminal liability. At the same time, withdrawing funds may often be accompanied by illegal and criminal activities such as embezzlement and misappropriation of funds.

As for the determination of the scope of the subject requesting shareholders to fulfill their capital contribution obligations, Article 13 (1) 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)" clarifies the scope of the subject requesting shareholders to fulfill their capital contribution obligations. suing shareholders for whether they have fulfilled their capital contribution obligations does not affect their right to sue other shareholders who have not contributed capital to fulfill their capital contribution obligations as the subject.