Introducing the One-Yuan Chinese Company: Impacts of the 2014 PRC Company Law Amendments on Shareholder Liability and Creditor Protection

Hawes, C; Lau, K-LA; Young, A

Introducing the One-Yuan Chinese Company: Impacts of the 2014 PRC Company Law Amendments on Shareholder Liability and Creditor Protection

Hawes, C

Lau, K-LA Young, A

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Publisher:: Sweet and Maxwell
Publication Type:: Journal Article
Citation:: Company Lawyer, 2017, 38, (5), pp. 163-168
Issue Date:: 2017

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Field	Value	Language
dc.contributor.author	Hawes, C https://orcid.org/0000-0003-3796-8421
dc.contributor.author	Lau, K-LA
dc.contributor.author	Young, A
dc.date.accessioned	2020-11-12T05:11:34Z
dc.date.available	2020-11-12T05:11:34Z
dc.date.issued	2017
dc.identifier.citation	Company Lawyer, 2017, 38, (5), pp. 163-168
dc.identifier.issn	0144-1027
dc.identifier.uri	http://hdl.handle.net/10453/143957
dc.description.abstract	Following amendments to the Company Law of the People’s Republic of China in 2014 (the 2014 Company Law), which removed minimum registered capital requirements for most limited liability companies (LLCs), it is now theoretically possible to establish a Chinese company with only 1 yuan of capital. This is a significant change to the Chinese corporate regulatory regime. It is not unusual in civil law jurisdictions to require relatively high levels of registered capital—in Germany, the Gesellschaft mit beschränkter Haftung (GmbH), which is roughly equivalent to the LLC, still sets a minimum capital requirement of €25,000.2 Yet China’s capital requirements were among the highest in the world until the 2014 amendments. Prior to 2006, the PRC Company Law required shareholders establishing an LLC to collectively pay in at least 500,000 yuan (approximately €60,000, or US$80,000) in cash or equivalent-value assets over a regulated time period in order for the LLC’s registration to be valid.3 While the 2006 Company Law reduced this amount to 30,000 yuan for an LLC with two or more shareholders, and 100,000 yuan for a single-shareholder LLC, no opportunity was given for previously registered companies to reduce their capital without going through a cumbersome procedure involving shareholder and creditor approval.4 In the official announcement of the 2014 amendments, the reasons given for removing minimum capital requirements included making the company registration process cheaper, more efficient, and less complex; reducing government interference in the market decisions of investors; and replacing a paternalistic administrative regulatory system with a market-based disclosure and monitoring system. The ultimate aim is to stimulate innovation among businesses and foster economic development. These reasons could have been drawn almost verbatim from the pages of vocal critics of the European company law legal capital rules.6 These critics have roundly attacked the normal justification for high minimum registered capital levels, which is that the capital provides a financial “buffer” to protect unsecured or involuntary creditors. They point out the most serious flaw in this creditor protection argument: the company’s capital is not retained in a segregated fund, but may be used by the company for its normal business purposes. Thus, if the company is poorly managed, its liabilities will soon outweigh its capital, and any security that the capital was supposed to provide to creditors will prove illusory.
dc.language	en
dc.publisher	Sweet and Maxwell
dc.relation.ispartof	Company Lawyer
dc.relation.hasversion	Accepted Manuscript Version	en
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	15 Commerce, Management, Tourism and Services, 18 Law and Legal Studies
dc.title	Introducing the One-Yuan Chinese Company: Impacts of the 2014 PRC Company Law Amendments on Shareholder Liability and Creditor Protection
dc.type	Journal Article
utslib.citation.volume	38
utslib.for	1801 Law
utslib.for	15 Commerce, Management, Tourism and Services
utslib.for	18 Law and Legal Studies
pubs.organisational-group	/University of Technology Sydney/Faculty of Law
pubs.organisational-group	/University of Technology Sydney
utslib.copyright.status	open_access	*
pubs.consider-herdc	false
dc.date.updated	2020-11-12T05:11:30Z
pubs.issue	5
pubs.publication-status	Published
pubs.volume	38
utslib.citation.issue	5

Abstract:

Following amendments to the Company Law of the People’s Republic of China in 2014 (the 2014 Company Law), which removed minimum registered capital requirements for most limited liability companies (LLCs), it is now theoretically possible to establish a Chinese company with only 1 yuan of capital. This is a significant change to the Chinese corporate regulatory regime. It is not unusual in civil law jurisdictions to require relatively high levels of registered capital—in Germany, the Gesellschaft mit beschränkter Haftung (GmbH), which is roughly equivalent to the LLC, still sets a minimum capital requirement of €25,000.2 Yet China’s capital requirements were among the highest in the world until the 2014 amendments. Prior to 2006, the PRC Company Law required shareholders establishing an LLC to collectively pay in at least 500,000 yuan (approximately €60,000, or US$80,000) in cash or equivalent-value assets over a regulated time period in order for the LLC’s registration to be valid.3 While the 2006 Company Law reduced this amount to 30,000 yuan for an LLC with two or more shareholders, and 100,000 yuan for a single-shareholder LLC, no opportunity was given for previously registered companies to reduce their capital without going through a cumbersome procedure involving shareholder and creditor approval.4 In the official announcement of the 2014 amendments, the reasons given for removing minimum capital requirements included making the company registration process cheaper, more efficient, and less complex; reducing government interference in the market decisions of investors; and replacing a paternalistic administrative regulatory system with a market-based disclosure and monitoring system. The ultimate aim is to stimulate innovation among businesses and foster economic development. These reasons could have been drawn almost verbatim from the pages of vocal critics of the European company law legal capital rules.6 These critics have roundly attacked the normal justification for high minimum registered capital levels, which is that the capital provides a financial “buffer” to protect unsecured or involuntary creditors. They point out the most serious flaw in this creditor protection argument: the company’s capital is not retained in a segregated fund, but may be used by the company for its normal business purposes. Thus, if the company is poorly managed, its liabilities will soon outweigh its capital, and any security that the capital was supposed to provide to creditors will prove illusory.

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http://hdl.handle.net/10453/143957