Transition Guide for Existing Companies: 3 Compliance Paths Under China’s New Company Law

China’s comprehensive Company Law revision takes effect on July 1, 2024. This landmark update introduces stricter governance, clearer shareholder obligations, and accelerated timelines – demanding immediate action from existing companies. Failure to comply risks penalties, director liability, operational disruption, and reputational damage with international partners.

This guide outlines critical compliance pathways for three common company types. Proactive adaptation isn’t just about avoiding fines; it’s about building resilient, trustworthy operations in China’s evolving market.

1. Companies with Unpaid/Underpaid Capital Contributions (Art. 47, 52)

The Change: The new law imposes a strict 5-year deadline (from company establishment) for shareholders to fully pay their subscribed capital. Companies registered before July 1, 2024, enter a transition period but must adjust to meet this requirement. Crucially, boards now have an enforceable duty to actively monitor and enforce capital contributions (Art. 51, 52).

Your Immediate Risks:

• Shareholder Dilution/Loss of Rights: Companies can issue a “loss of rights” notice to non-compliant shareholders after a 60-day grace period, stripping them of their unpaid shares (Art. 52).
• Director Liability: Boards failing to diligently issue capital call notices can be held personally liable for resulting company losses (Art. 51).
• Accelerated Payment Demands: Creditors can demand early payment from shareholders if the company cannot pay debts, even if the contribution deadline hasn’t passed (Art. 54).
• Joint Liability: Transferors of unpaid shares remain partially liable to the company if the transferee defaults (Art. 88).

Compliance Pathway:

1. Audit Capital Status: Immediately verify the paid-up status of all shareholder contributions against the company’s AIC registration records. Identify deficiencies. (Need authoritative verification? Verify a Chinese company’s capital status).
2. Board Action: Formally notify delinquent shareholders (in writing) demanding payment within the statutory 60-day minimum grace period. Document this process meticulously.
3. Enforce Consequences: If payment isn’t made, the Board must pass a resolution to issue a “loss of rights” notice, canceling the unpaid shares.
4. Capital Adjustment: Address the capital shortfall: recruit new investors for the canceled shares, have existing shareholders cover the gap proportionally, or formally reduce registered capital.
5. Update Records: Promptly amend the shareholder register, articles of association, and AIC registration details.

2. Single-Shareholder Limited Liability Companies (Art. 23, 60)

The Change: The “corporate veil” is easier to pierce for single-shareholder LLCs. If the shareholder cannot prove clear separation between personal and company assets, they face unlimited joint liability for company debts (Art. 23). Governance is simplified (no shareholder meetings required), but documentation requirements are heightened.

Your Immediate Risks:

• Personal Asset Exposure: Failure to maintain rigorous financial separation puts homes, savings, and other personal assets directly at risk from business creditors.
• Scrutiny from Partners: International partners and financial institutions will demand heightened proof of asset separation before engaging.

Compliance Pathway:

1. Strict Financial Segregation:
   • Maintain completely separate bank accounts (never co-mingle funds).
   • Ensure all company transactions have clear business purposes and proper documentation (contracts, invoices).
   • Never use company accounts for purely personal expenses.
2. Robust Governance Records: Despite no formal meetings, document all significant decisions (investments, loans, asset sales, key hires) in signed written resolutions filed meticulously.
3. Regular Independent Audits: Conduct annual financial audits by a reputable third-party firm. This provides objective proof of asset separation and sound financial practices.
4. Transparency with Counterparties: Proactively provide evidence of compliance (audits, governance resolutions) to reassure international partners during due diligence. (Providing proof of compliance builds trust with overseas partners).

3. Dormant or Non-Operating Companies (Art. 229, 230, 240)

The Change: The law streamlines exit mechanisms but also increases risks for inactive companies. Directors bear explicit responsibility as “liquidating obligors” (Art. 232). They must initiate liquidation within 15 days of a dissolution trigger (e.g., license revocation, shareholder resolution). Crucially, a new “Simple Cancellation Procedure” exists for debt-free companies (Art. 240).

Your Immediate Risks:

• Director Liability: Failing to initiate timely liquidation after dissolution exposes directors to personal liability for company losses or creditor claims (Art. 232).
• Administrative Penalties & Blacklisting: Non-operating companies risk fines and mandatory administrative cancellation by the AIC after 3 years (Art. 241), damaging the reputation of involved individuals.
• Shareholder Liability (Simple Cancellation): If using the simple cancellation process, shareholders personally guarantee all pre-cancellation debts if their “debt-free” declaration is false (Art. 240).

Compliance Pathway:

1. Assessment & Decision:
   • Truly Dormant & Debt-Free? Pursue Simple Cancellation (Art. 240):
     • Obtain signed debt-free declarations from ALL shareholders.
     • Publish the cancellation announcement via the National Enterprise Credit Information Publicity System (NECIPS) for 20+ days.
     • If no objections, apply to the AIC for cancellation within 20 days after the announcement period.
   • Operating or Has Debts? Either Resume Operations (update licenses, filings) or initiate Formal Liquidation (Art. 232-239):
     • Board must form a liquidation group within 15 days of dissolution trigger.
     • Follow strict creditor notification, asset realization, debt settlement, and distribution procedures.
     • File final liquidation report with AIC for cancellation.
2. Avoid “Ghost” Status: Never simply abandon operations. Actively choose and execute a compliant path – revival or orderly exit.

Why Proactive Verification is Your Strategic Advantage

China’s regulatory environment demands transparency. For foreign businesses engaging with Chinese partners during this transition:

• Due Diligence is Non-Negotiable: Relying on outdated or unverified information is perilous. The capital status, shareholder compliance, and operational legitimacy of your Chinese counterparties directly impact your risk.
• Trust Needs Proof: Authoritative documentation (AIC Credit Reports, verified shareholder records) is the currency of trust in cross-border business.

Navigating the New Company Law transition requires diligence and access to accurate information. ChinaBizInsight specializes in providing authoritative verification of Chinese business credentials, from official credit reports and shareholder structures to license validity. Ensure your partners are compliant – verify their status today.

Protect Your Business:

• Verify Chinese Company Capital & Compliance
• Comprehensive Due Diligence Reports
• Understand Your Partner’s Structure