Case review
On January 28, 1992, Tonghai Company was incorporated with a registered capital of 34.5 million French francs, and its shareholders were Haima Company and BEFS Technology Co., Ltd. The "Articles of Association of Tonghai Company" stipulates that the capital contribution of Party A (Haima Company) to the company's registered capital is the equivalent (assets) of 17.25 million French francs, which includes the land use rights of the factory site, the land use rights and extraction rights of the sand site, and the factory.
The "Capital Verification Report" states that the physical object invested by China in the third phase, the factory, was delivered for use on December 31, 1995, with an appraised value of RMB 175,981,71.60. However, the main factory building has not yet obtained the real estate certificate, and the relevant certificates for land use rights, technology licenses and exclusive rights have not been obtained.
On July 4, 2011, a lawsuit occurred between Jiachen Company and Tonghai Company. In this case, a high court made a judgment and ordered Tonghai Company to repay a loan debt of 82.93 million French francs (equivalent to 101.66 million yuan) to Jiachen Company.
On October 11, 2014, the Jiachen Company Court filed a lawsuit, claiming that Haima Company, as a shareholder of Tonghai Company, had obviously made false capital contributions, abused Tonghai Company's independent legal person status and the limited liability of shareholders, evaded huge debts, and seriously damaged the interests of creditors. It requested an order to order Haima Company to repay 82.93 million French francs (equivalent to RMB 101.66 million) to Jiachen Company. [The companies mentioned in the case are all pseudonyms]
case outcome
After hearing the case, the court ruled that the lawsuit of Jiachen Company should be dismissed.
Zeda analysis
Beijing Zeda Law Firm will provide you with the following legal analysis based on this case:
1. In what forms can shareholders contribute capital?
According to Article 48 of my country's new "Company Law" that will be implemented on July 1, 2024, shareholders' capital contributions are divided into two categories: monetary investment and non-monetary property investment, and the scope of non-monetary property is significantly expanded compared with the old law. Under the dual standards of "available monetary valuation" and "transferable in accordance with the law", new statutory forms such as equity and debt rights have been added, providing a more flexible path for corporate financing.
Currency investment is the most basic form of investment, covering RMB and freely convertible foreign currencies that comply with foreign exchange management regulations. In practice, shareholders need to ensure that the source of funds is legal, and the purpose of "investment funds" must be indicated when transferring money through banks. If they entrust others to pay on their behalf, the identity of the actual investor must be indicated to avoid ownership disputes.
Non-monetary property investment includes five typical forms:
1. Physical objects (such as houses, equipment, raw materials) must have clear ownership, no encumbrances, and be available to the company;
2. Intellectual property rights (such as patents, trademarks, copyrights) need to ensure that technology delivery is barrier-free and ownership is clear;
3. Land use rights are limited to state-owned land obtained with compensation. Allocation or collective land requires payment of transfer fee or conversion of nature;
4. Equity ownership must be complete and flawless, and legal procedures such as other shareholders’ preemptive rights must be fulfilled;
5. Claims are divided into "debt-for-equity" (debts converted into equity during the company's duration) and ordinary debt contributions (claims against third parties, but the discount risk needs to be carefully assessed due to uncertainty in repayment) 157.
Special attention should be paid to the fact that the law explicitly prohibits capital contributions in the form of labor services, credit, names of natural persons, goodwill, franchise rights, or property with guarantees, because they are difficult to value or transfer.
No matter what non-monetary form is used, shareholders need to perform two core procedures: valuation (value verification by professional institutions to prevent overestimation or underestimation) and property rights transfer (movable property delivery, real estate/equity transfer registration). Otherwise, they may be deemed to have not fully fulfilled their investment obligations, which will lead to joint and several liability or the risk of loss of rights.
2. In this case, did Haima Company, as a shareholder of Tonghai Company, fulfill its capital contribution obligations?
According to Article 28 of the Company Law (amended in 2018), if non-monetary investment is made, property rights transfer procedures must be completed in accordance with the law. If the physical capital contribution is in place and put into use and it is objectively impossible to go through the transfer procedures, and it complies with the circumstances specified in Article 10 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 (3)" "Property that has been actually delivered for use although the ownership change procedures have not been completed, it has played an asset role for the company and has essentially achieved the purpose of the capital contribution", it should be deemed that the ownership transfer procedures have been completed.
On the other hand, if the investor has gone through the ownership change procedures but has not actually delivered the property to the company for use, the company or other shareholders may claim that the investor delivered the property to the company and will not enjoy the corresponding shareholder rights until the actual delivery. The People's Court will support this claim.
In this case, according to the Articles of Association of Tonghai Company, Haima Company used the land use rights of the factory site, the land use rights and extraction rights of the sand site and the factory as capital contributions, with the capital contribution being the equivalent (assets) of 17.25 million French francs. The "Capital Verification Report" states that the physical object invested by China in the third phase, the factory, was delivered for use on December 31, 1995, with an appraised value of RMB 175,981,71.60. Therefore, Haima Company has actually delivered the physical plant invested by China in the third phase to Tonghai Company for use in accordance with its articles of association.
In summary, it should be determined that Haima Company has fully fulfilled its capital contribution obligations to Tonghai Company, and Jiachen Company’s claim that Haima Company failed to fulfill its capital contribution obligations lacks factual and legal basis.
Message from lawyer
In practice, there are many situations where real estate investment is delivered but ownership changes are not processed. With the official implementation of the new company law, investing shareholders should promptly register changes in ownership. If the shareholder completes ownership registration within the grace period stipulated in the company's notice, the date of his capital contribution shall be registered based on the date of actual delivery of the real estate. Otherwise, under the new company's loss of rights system, the shareholder may lose his shareholder rights if he fails to complete ownership registration within the grace period stipulated in the company's notice.
The board of directors should also verify the shareholder's capital contribution. If it is found that the shareholder has not paid the capital contribution stipulated in the company's articles of association in full and on time, the company should issue a written reminder to the shareholder to call for the capital contribution. If the company's board of directors fails to perform its obligations stipulated in the preceding paragraph in a timely manner and causes losses to the company, the responsible directors shall be liable for compensation.
The lawyers of Beijing Zeda Law Firm sort out and study different legal regulations, hot topics, cases, and judgment documents, aiming to provide more readers with different research angles and observation perspectives. However, it should be noted that our country is not a case law country, and the details of different cases in judicial practice vary widely, so blind reference must not be made.
If you encounter similar disputes that are difficult to resolve, it is also recommended that you consult the professional lawyers of Beijing Zeda Law Firm in a timely manner to better protect your legal rights and interests.
