Rediscussion on the form and substantive issues in the company's capital reduction
On September 29, 2022, the Jiangsu Provincial High Court released the "Typical Case of Jiangsu Court Company Trial from 2020 to 2021" in its official WeChat official account. The second case, "The Freight Company v. Chen, Xu, and Yang Company's capital reduction dispute case" has aroused criticism from many industry predecessors, believing that the case clearly violates the basic principle of " Shareholder Limited Liability " in the " Company Law " and should be a typical "judicial strangle". However, the author believes that the Nanjing Intermediate People's Court's re-judgment did not break through the principle of shareholder limited liability. On the contrary, on the basis of taking into account the limited liability of shareholders, it also balances the interests of the company, shareholders and creditors, and improves some issues in practice of "formal capital reduction".
[Case Summary] (Source: Jufa Case)
The facts found by the Jiangning District People's Court of Nanjing City as the first instance court are as follows (Case No.: (2019) Su 0115 Minchu No. 6846):
On July 14, 2015, Silide Company was registered and established by the company registration agency, and its nature is a limited liability company, with registered capital 1 million yuan, shareholders are Xu Guangrong (capital amount of 400,000 yuan, capital contribution period June 26, 2030), Chen Yaguang (capital amount of 300,000 yuan, capital contribution period June 26, 2030), and Yang Moumou (capital amount of 300,000 yuan, capital contribution period June 26, 2030);
On October 18, 2017, Xu Guangrong and Chen Yaguang remitted 400,000 yuan and 300,000 yuan to the bank account of Silide Company respectively, and the notes are registered capital. On October 26, 2017, Yang Moumou remitted 300,000 yuan to Silide Company's bank account, with the notes being an investment amount;
On June 26, 2018, the People's Court of Pukou District, Nanjing made the civil judgment No. (2018) Su0111 Minchu 1278, ruling that Silide Company paid Jiaxiang Company an agency fee of 418,274.5 yuan and liquidated damages to Jiaxiang Company within five days from the date of effectiveness of this judgment (calculated at an annual interest rate of 24% from April 13, 2017 until the actual payment was made);
On September 14, 2018, Silide Company made a shareholders' meeting resolution: agreeing to reduce the company's registered capital from 1 million yuan to 700,000 yuan. After this capital reduction, the company's shareholders invested and the investment ratio were as follows: shareholder Chen Yaguang reduced the investment by 300,000 yuan; shareholder Xu Guangrong held 400,000 yuan, accounting for 57% of the registered capital, and shareholder Yang Moumou held 300,000 yuan, accounting for 43% of the registered capital;
On September 15, 2018, Silide Company published an announcement in the Jinling Evening News, stating that according to the planned registration capital of 1 on September 14, 2018, it was announced that the registered capital was 1 on the basis of the planned September 14, 2018 The reduction of RMB 000,000 to RMB 700,000 is now announced. Creditors may require the company to repay its debts or provide guarantees within 45 days from the date of announcement;
On November 10, 2018, Silide Company issued an explanation for the repayment of the company's debts or provide guarantees: According to the relevant provisions of the Company Law, the company reduced the company's registered capital from RMB 1 million to RMB 700,000 by the shareholders' meeting on September 14, 2018. On September 15, 2018, a capital reduction announcement was issued in the Jinling Evening News. As of November 10, 2018, the company's position repayment and guarantee provision are as follows: By November 10, 2018, the company has paid off or provided corresponding guarantees;
On January 31, 2019, the People's Court of Pukou District, Nanjing City issued the execution ruling (2018) Su 0111 Execution 3529, in order to find no other property available for execution, and the applicant for execution failed to provide it. His property clues were made on the grounds that the execution procedure of the case was concluded;
Nanjing Intermediate People's Court as the second instance court in this court stated as follows (case number: (2020) Su 01 Minzhong No. 11565):
During the second instance, neither party submitted new evidence and had no objection to the facts found in the first instance. This court confirms the facts of the case found in the first instance. After trial, this court found that all parties had no objection to Jiaxiang Company being a known creditor of Silide Company and had no direct notice.
Jiangsu Higher People's Court As a retrial court, this court believes that part of it is as follows ((2021) Su Minshen No. 5976):
However, in this case, Silide Company not only had serious flaws in the notification procedure when reducing capital, but also failed to prepare a property list and balance sheet in accordance with the law. Since Silide Company's accounting books have been lost, it is impossible to conclude that Chen Yaguang did not retrieve the property from the company based on the bank statement submitted by Chen Yaguang.Moreover, even though Chen Yaguang did not retrieve the capital from Silide Company, Chen Yaguang's equity was converted into a debt. In addition, the resolution of the shareholders' meeting was made by the three shareholders, and the second-instance court ordered Xu Guangrong and Yang to bear joint and several liability for the debts of Chen Yaguang, the shareholder, to reduce capital, and there was no improperness.
also excerpts the [Typical Significance] part in "Typical Significance of Jiangsu Court Company Trial Typical Cases in 2020-2021" as follows:
[Typical Significance] The company's capital constitutes the credit basis for the company's foreign exchanges, and the counterparty to the company's transactions often judges the company's credit status based on the company's registered capital. The company's capital reduction will reduce the company's liability and property, reduce the shareholder's responsibility, and affect the company's debt repayment ability. Therefore, the Company Law clearly requires that the company's capital reduction should notify creditors within ten days from the date of making the resolution to reduce the registered capital, and announce it in the newspaper within thirty days. In this case, the company did not notify the known creditor of capital reduction, and there were procedural flaws. Even if the shareholder did not actually withdraw capital, his equity had been converted into a claim against the company, which was equivalent to the shareholder being able to obtain repayment at the same level as the creditor, which in disguise reduced the company's liability and property. In practice, the company's capital reduction must be strictly implemented in accordance with the statutory conditions and procedures to avoid playing the edge. Otherwise, it will not only actually affect the interests of the company's creditors, but also easily cause troubles to the shareholders who reduce capital.
[Author’s Views]
1. The key to formal capital reduction and substantial capital reduction is whether there is any use of capital reduction to withdraw funds.
When it comes to "formal capital reduction", we have to mention Supreme People's Court (2019) Supreme People's Court Min Ai No. 144. In this case, the second-circuit judges' meeting of the Supreme Court , the company's capital reduction was further divided into two types: substantial capital reduction and formal capital reduction. At the same time, in the case where the capital reduction procedure is illegal, there are two views on whether formal capital reduction constitutes withdrawal of capital contribution:
denies that: shareholders' withdrawal of capital contribution leads to a reduction of the company's liability and property, which is essentially a shareholder infringes on the company's property rights, so the part that the company's debt cannot be repaid within the scope of capital withdrawal should be liable for supplementary compensation. Although manipulating a company to reduce capital in violation of statutory procedures is a way for shareholders to withdraw capital, if the shareholders do not withdraw capital from the company during the company's capital reduction process and does not lead to a reduction in the company's liability property, this kind of capital reduction is only a formal capital reduction. In the case of formal capital reduction, shareholders do not use the company's capital reduction procedures to infringe on the company's property rights and do not harm the interests of the company's creditors. Therefore, it cannot be determined that shareholders should bear the responsibility of to withdraw from 's capital reduction procedures only because the company's capital reduction procedures are illegal.
affirmatively said: a company should comply with strict legal procedures when reducing its registered capital, including notifying creditors and providing guarantees or repaying debts as required by creditors. A decrease in company registered capital means that the company's liability and property is reduced and the ability to repay debts is reduced, which has an adverse impact on the realization of the claims of the company's creditors. When a company fails to reduce capital in accordance with the law and causes the debts formed before the capital reduction to be paid, the company's shareholders shall bear the responsibility of withdrawing capital contribution.
Finally, the judge's opinion adopted the negative statement, saying that it believed that: "The company has procedural violations in the process of capital reduction, which is two different problems from the shareholders using the company to reduce capital and withdraw capital. The responsible entity for illegal capital reduction is the company, and the responsible entity for withdrawal of capital is the shareholder. Therefore, it cannot be determined that the shareholder withdraws capital only because the company's capital reduction procedures are illegal. This case focuses on measuring whether the shareholders have withdrawn capital during the process of illegal capital reduction. The shareholder withdrawal behavior of capital withdrawal is essentially the shareholder's infringement of the company's property rights, resulting in the reduction of the company's liability property. If the shareholders do not actually withdraw funds during the process of capital reduction, it is a formal capital reduction, that is, although the registered capital registered by the company has decreased, the company's liability property has not changed. In this case, although the company's capital reduction is illegal, the relevant management authority should impose certain penalties on it. However, shareholders did not use the company's capital reduction procedures to actually withdraw capital, infringe on the company's property rights, nor did they harm the interests of creditors. Therefore, shareholders cannot be determined to constitute capital withdrawal because the company's capital reduction procedures are illegal.
The author believes that:
1. The discussion on formal capital reduction and substantial capital reduction is based on the premise that the capital reduction procedures are illegal, and it is intended to resolve the capital reduction procedures. Because the formal capital reduction does not actually damage the company's solvency, there is no damage to the interests of creditors, so the responsibility for capital reduction and withdrawal should not be confused. The Supreme Court's view is actually a dismantling of the "other acts of withdrawing capital without legal procedures" in Article 12 of the current "Interpretation of the Company Law III", that is, if the capital reduction procedure is illegal and there is indeed a shareholder withdrawing capital during the reduction process, it should be a "retrieval of capital without legal procedures", that is, a substantial capital reduction. If the capital reduction procedure is illegal but there is no situation where the shareholder withdraws capital, it is naturally difficult to meet the conditions of "retrieval of capital without legal procedures" in Article 12, and this article should no longer be used to determine that shareholders use capital reduction to withdraw funds . Therefore, it can be seen that if the company's capital reduction does not violate the law in the procedures of the law, the interests of creditors will inevitably not be damaged. At this time, there is no need to distinguish between formal capital reduction and substantial capital reduction.
2. The key to distinguishing between formal capital reduction and substantial capital reduction is "whether the shareholders actually withdraw funds during the company's capital reduction process". The "funds" here should be further divided into two categories: "subscribed funds" and "paid funds". According to the expressions of "retrieval" and "funds" in Article 12 of the "Company Law III" "The expressions of "retrieval" and "funds" can be seen that the "funds" here should obviously refer to "paid funds", otherwise there will be no "retrieval" behavior. But it should be noted that if the shareholders reduce the "subscribed funds" through the capital reduction procedure, is the nature of the behavior "substantive capital reduction" or "formal capital reduction"? Can it be determined that the capital withdrawal is withdrawn? Although the Supreme Court did not clearly resolve this issue in the (2019) Supreme Court Civil Ali-Judicial Meeting No. 144, it is still used in the view that "the act of shareholders to withdraw capital is essentially a shareholder infringement of the company's property rights, resulting in a reduction of the company's liability and property." From the viewpoint, even if the capital reduction reduction is reduced by "subscribed funds", but the subject of the subscribed obligation is the shareholder and the beneficiary entity is the company, once the capital reduction procedure is illegal, the company's expectations for the amount of capital receivable will be destroyed, and the company is obviously also a damaged subject of illegal capital reduction. This behavior undermines the basic principle of capital determination.
But can the provisions of Article 12 of the "Interpretation III of the Company Law" be applied here, and it is believed that shareholders illegally reduce capital and reduce "subsidized funds" should be considered "capital withdrawal"?
The author believes that the following two specific situations should be distinguished:
The first type: When the shareholder subscribed capital is in accordance with the "accelerated maturity", the company's shareholders' meeting illegally reduces capital and reduces the shareholders' "subscribed funds" can be regarded as "escape capital". Although shareholders enjoy the interest on the subscription period, in cases where the company is unable to repay the due debts and the company is the person subject to execution, the people's court exhausts the execution measures and has no property for execution, and has a reason for bankruptcy, but does not apply for bankruptcy, referring to the opinions of the "Minutes of the Nine People's Meetings", the shareholder's subscription period is accelerated, that is, the "accelerated due" of the subscriber interest enjoyed by the shareholder becomes a "current obligation". At this time, the essence of reducing the "subscription funds" under the illegal capital reduction procedure is already a meeting of "capital payable", which will naturally cause a reduction of the company's solvency, which will directly lead to damage to the interests of creditors, so it meets the requirements of "capital contributions without legal procedures" in Article 12 of the "Interpretation III of the Company Law".
The second type: If the subscribed capital of shareholders does not meet the "accelerated maturity", even if the company's shareholders' meeting illegally reduces capital and reduces the "subscribed funds" of shareholders, it will be difficult to apply the provisions of Articles 12 and 13 of the "Interpretation III of the Company Law" to withdraw capital, requiring shareholders to bear supplementary compensation liability for the part of the company's debts within the scope of unpaid capital interest. Because the fact that the subscription period is not reached or when the "current obligation" is not achieved, it is difficult to "retrieve" and naturally it cannot be determined as withdrawal of capital contribution in accordance with Article 12 of the "Interpretation III of the Company Law".However, looking back, if the company does not have any situations where the due debt cannot be fulfilled and there is no situation where the execution cannot be implemented, then there will naturally be no possibility of harming the interests of creditors.
2. There is no evidence in this case that Chen Yaguang's capital reduction is in line with the "formal capital reduction". The views of the Nanjing Intermediate People's Court and the Provincial High Court do not conflict with the Supreme Court.
In combination with the above, whether the views of the Nanjing Intermediate People's Court or Jiangsu Provincial High Court conflict with the above views of the Supreme Court is that in this case, "Did Chen Yaguang actually withdraw funds from this capital reduction process?" If the funds are not withdrawn, it is a formal capital reduction. Otherwise, it should be a substantial capital reduction, and it should be considered as a capital reduction procedure to withdraw funds from the capital infringe on the company's property rights.
Based on the facts retrieved by the author, it can be seen that:
1. Chen Yaguang subscribed 300,000 yuan when the company was established and enjoyed the benefit of the subscription period until June 26, 2030. However, his behavior of paying 300,000 yuan of capital contribution to Silide's account on October 18, 2017 shows that he had waived the subscription period;
2. Silide Company knew that it was owed the capital reduction resolution and did not notify the known creditors;
2. Silide Company knew that it was owed the funds to the freight company but unilaterally made a capital reduction resolution and did not notify the known creditors;
2. Silide Company knew that it was owed the funds to the freight company but did not notify the known creditors;
3. The company issued an explanation for the repayment of the company's debts or providing guarantees issued by Silide. As of November 10, 2018, the company had paid off the debts or provided corresponding guarantees, but in fact it did not notify the known creditors in accordance with the regulations and did not actually fulfill any guarantee obligations for repayment or provision;
4. Chen Yaguang only issued a personal bank statement proof that he did not fail to retrieve the property from the company, but because Silide did not prepare a property list and balance sheet in accordance with the law during the reduction of capital, and Silide's accounting books have been lost, it is impossible to find out the true financial status of Silide.
So:
1. In this case, Chen Yaguang has actually contributed in advance, he no longer enjoyed the corresponding period of interest. When he himself has "paid in fact" and the company's capital reduction procedures are illegal, the bank statements submitted by him can only prove that the specific bank account has not retrieved property from the company. However, whether there is any act of retrieving property from Silide Company by other bank accounts is obviously due to the lack of property list and balance sheet and the loss of accounting books, which has led to the facts being unable to be identified. In terms of distance and ability to provide evidence, Chen Yaguang and other shareholders have the ability to prove that they do not have the ability to retrieve property from the company and distance that are stronger than creditors. However, when Chen Yaguang and others cannot explain the company's financial status and asset list, they should bear the adverse consequences of the inability to provide evidence, and it is obviously unrealistic to not hand over this part of the burden of proof to creditors.
2. In this case, if Slide Company notifies the freight company strictly in accordance with the statutory procedures, then the freight company may require Slide Company to immediately repay the debt or provide a guarantee that the freight company's claims may be fulfilled immediately, and the false debt repayment submitted by Slide Company directly leads to the loss of the opportunity for instant repayment of Slide Company.
3. Based on the fact that Chen Yaguang has recovered property from the company, it is impossible to ascertain and the burden of proof should be borne by Chen Yaguang, the author believes that it is difficult for Chen Yaguang to meet the conditions for "formal capital reduction". From the perspective of the heart evidence, if Chen Yaguang reduced his capital and did not retrieve his property from Silide, why did Silide spend a lot of effort to conceal the repayment of the company's debts? Why not notify known creditors? Why is the company's accounting books lost just after the company's capital reduction? List of assets that do not deteriorate when capital reduction and balance sheet? Therefore, the author believes that the statements of Chen Yaguang and others are difficult to convince people that they have failed to retrieve their property. After all, neither the referee nor the attorney is a participant in objective facts. We can only restore fragmentary facts based on the existing evidence and piece together a complete "truth" based on the statements and corrections of all parties. In this case, it is difficult to recognize that the "truth" described by Chen Yaguang and others is true, regardless of the motivation or behavior.
4. As the High Court said, if Chen Yaguang really did not retrieve the property from Silide Company, but the overall resolution on reducing capital is not invalid due to defects, Chen Yaguang also enjoys a claim against Silide Company, and the repayment of the claim will inevitably lead to a loss of Silide Company's solvency, so it still belongs to the category of harming the interests of creditors.
In summary, the views of the Nanjing Intermediate People's Court and the Jiangsu Provincial High Court do not conflict with the views of the Supreme Court (2019) Case No. 144. On the contrary, the author believes that the views of the Nanjing Intermediate People's Court and the Jiangsu Provincial High Court are the improvement of the "formal capital reduction" of the Supreme Court. For example, the burden of proof of the "unretrieval of funds" in the formal capital reduction should be proof by the beneficiary of the capital reduction, and the "subscription period benefits" are no longer enjoyed because of the fact that they are paid in advance.
3. This case did not break through the "shareholder limited liability", but instead it is the implementation of the "shareholder limited liability".
Shareholder limited liability is an old topic, and the basic theory will not be described in detail, but according to the current regulations, the meaning of "limited liability" means that the company is responsible for the company's debts with all its property; shareholders are responsible to the company with the limit of the capital contribution they subscribe. Returning to this case, the Nanjing Intermediate People's Court ordered Chen Yaguang to bear additional compensation liability for Silide's debt within the scope of a 300,000 yuan reduction. Xu Guangrong and Yang Moumou bear joint and several liability for Chen Yaguang's second debt. Is it a breakthrough to "limited liability for shareholders"?
The author believes that this case is an implementation of the principle of shareholders' limited liability, not a breakthrough.
1. The premise of limited liability is based on shareholders being able to govern within the framework stipulated by law. In this case, Chen Yaguang and the other three failed to comply with the provisions of the capital reduction procedures, knowing that Silide has debts to the outside world and knowing that the creditors have the right to comply with the provisions of the capital reduction procedures, which is itself a destruction of the boundary of the company's autonomy. For Chen Yaguang, he could not convince the possibility of "formal capital reduction" in the case where he could not submit the property list of Silide Company, balance sheet and accounting books. Therefore, according to Article 14 of the "Company Law Interpretation III", the creditor requested the shareholders who withdraw capital to take additional compensation liability for the part of the company's debts that cannot be paid within the scope of capital withdrawal, and the Intermediate Court ordered him to reduce capital by 300,000 yuan. The liability for additional compensation for debts within the scope is itself a "supplementary compensation" within the scope of the "paid funds" based on the benefit of its capital reduction, namely the "paid funds", and does not exceed the scope of "limited liability" of 300,000 yuan. Chen Yaguang is required to bear joint and several liability for all debts of Silide. Article 14 also clearly stipulates that if shareholders who withdraw capital have already assumed the above responsibilities and other creditors make the same request, the people's court will not support it. This is a re-clearization of the "limited liability of shareholders". How can there be a "breakthrough"?
2. In addition, referring to the view of the article "Stock Responsibility Issues for Companies' Flaws in Capital Reduction under the Registered Capital Subscription System | Practical Minutes" released by the Shanghai No. 1 Intermediate People's Court believes that even if there are defects in the capital reduction procedure, the effectiveness of the company's capital reduction should not be easily denied as a whole, but creditors who have not been legally and effectively notified can claim that the capital reduction will not have legal effect on their individuals. Therefore, from this perspective, Chen Yaguang's capital reduction behavior is only effective for specific creditors because of the flaws. At the same time, Chen Yaguang has paid 300,000 yuan in capital on October 18, 2017, so it seems that even if this capital reduction does not work for the creditors, Chen Yaguang actually paid the capital and met the conditions of "being liable for the company's debts by subscribed capital", and required him to bear supplementary compensation liability within the scope of 300,000 yuan in capital reduction, which is also part of the perspective of criticizing this case.
However, the fact that cannot be ignored in this case is that not only did Silide notify the known creditors, but also made the repayment and guarantee statements clearly promised that they had paid or provided the guarantee. At the same time, the company's financial status could no longer be verified whether Chen Yaguang actually allowed Chen Yaguang to retrieve the property, and the company's actual capital contribution and the overall effectiveness of the company's capital reduction should be valid, the direct consequence is that the creditors lost the opportunity to ask Silide Company to immediately repay or provide guarantees, but Chen Yaguang and Silide Company did not bear any responsibility for illegal capital reduction. Is it fair?
3. The fact that other shareholders assisted Chen Yaguang in withdrawing capital is actually referring to the constituent elements of infringement. The other shares that require the assistance to withdraw capital are also within the scope of "300,000". Even if other shareholders have paid the capital, the "300,000" of this part is not based on the obligations of other shareholders for failing to fulfill their "capital contribution obligations" or "capital withdrawal" but is the obligations of "assisting capital withdrawal". It is essentially two concepts in shareholders' limited liability for "shareholders to bear responsibility to the company within the amount of capital contribution they subscribed".
has said so much, and everyone's arguments have their own case support and their own interpretation of the legal perspective. However, in this case, the author believes that the High Court's promotion of this case to a "typical case" is a refinement and clarification of the company's formal capital reduction and substantial capital reduction. At the same time, it is clear that the burden of proof under formal capital reduction and related obligations in shareholder capital reduction. Due to limited ability, mistakes are inevitable in writing. Please criticize and correct me.
