Posted by Why it matters:
Dec 23, 2024 – The Legislative Affairs Commission of the National People’s Congress (NPC) has confirmed that the subscribed capital system under the revised Company Law will not apply retroactively. Previously, the Supreme People’s Court (SPC) required compliance with the new law’s registered capital requirements, contradicting civil law’s non-retroactivity principle. This NPC initiative has been welcomed by the market and legal community – as a sign of China’s commitment to further optimizing the business environment.
Driving the news:
- The NPC’s Legislative Affairs Commission clarified that companies established under the subscription-based capital system are not legally required to fully pay their registered capital unless explicitly stated in their articles of association.
- This announcement counters a controversial SPC judicial interpretation that suggests all companies with unreasonably high registered capital must pay their registered capital within a specified timeframe or adjust (reduce) their registered capital, which implies retroactivity.
The backstory:
- NPC is the highest legislative body in China – Although some critics argue that the NPC functions as a “rubber stamp,” it remains the most powerful institution in the country from an objective standpoint. This means that, despite perceptions of limited autonomy, the NPC has the ultimate authority to enact, amend, and interpret laws, making it an essential pillar of China’s legal and political framework.
- Judicial interpretations by the SPC are a crucial part of China’s legal system: these interpretations have a significant influence on the application and operation of laws.
- The Legislative Affairs Commission of the NPC has the critical task of reviewing and studying judicial interpretations issued by the SPC: If the Commission finds that any interpretation contradicts constitutional provisions, principles, or the spirit of the laws, it is mandated to raise concerns and provide feedback. This process ensures that all judicial interpretations align with the highest legal authority and uphold the constitutional framework, reinforcing the rule of law in China.
- From paid-in to subscribed capital: In 2014, China’s Company Law transitioned from a paid-in capital system – which required companies to deposit their registered capital upfront – to a subscription-based system designed to promote massive entrepreneurship.
- Challenges from the subscribed capital system: Under the subscripted capital system, some companies declared registered capital amounts far exceeding their financial capacity, creating distortions in the market. For example, some companies make use of abnormal and extremely large “unpaid” registered capital to execute frauds among older people.
- The 2024 shift: The latest amendments to the Company Law reintroduce stricter rules, requiring companies to pay their registered capital within a specified timeframe to enhance market credibility.
- Increased social costs: The requirement of paid-in capital from both newly revised Company law and SPC’s interpretation prompted many Chinese companies to reduce their registered capital to avoid penalties and liabilities, leading to administrative inefficiencies and increased social costs.
Between the lines:
- In the context of China’s economic slowdown, adding social costs could significantly impede the recovery process. While it is essential to address social needs and responsibilities, we must recognize that an overburdened economy could struggle to regain its momentum if additional costs are imposed.
- At the same time, maintaining the integrity of the law is crucial for fostering market confidence, not only within China but also among global investors. A strong, transparent, and predictable legal framework is fundamental to ensuring that both domestic and foreign stakeholders trust the Chinese legal system. This trust, in turn, plays a pivotal role in securing the long-term stability and prosperity of China’s economy.
What they’re saying:
- The NPC’s Legislative Affairs Commission underscored the importance of upholding non-retroactivity to maintain a predictable legal environment and investor trust.
- Legal scholars have noted that retroactive enforcement could erode confidence in China’s business laws, particularly during an economic slowdown.
- The market and lawyers very much welcome this initiative of the NPC.
The bottom line:
China’s legal system remains a cornerstone of its governance framework. Despite criticisms of more centralized power under President Xi Jinping, these developments demonstrate the system’s ongoing commitment to balancing legal principles, market stability, and economic innovation.
You may refer to the details here (in Chinese): http://www.npc.gov.cn/npc/c2/c30834/202412/t20241223_441852.html