The New PRC Company Law took effect on 1st July 2024, in which some new requirements were introduced for businesses operating in China. We summarized some key changes that you should pay attention to and take measures in response when necessary.
Registered Capital
According to the New Company Law, the registered capital should be paid up within 5 years after the incorporation. Whereas under the old Company Law, the company is given discretion to determine a schedule under which the registered capital could be injected. In order to reconcile the difference of capital injection timeline under two Company Laws, businesses established before 1st July 2024 are given 3-year’s grace period to change the timeline of paying up the capital. These companies should change the capital injection timeline in the Articles of Association (A&A) by 30th June 2027, and pay off the capital within 5 years after the A&A is updated (30th June 2032 by latest).
For example, assuming Company A updates the capital injection timeline to 5 years in A&A and completes the submission of updated A&A to the authority on 31st December 2024, it is obliged to pay all the capital by 31st December 2029 (5 years after the A&A is updated).
We understand that some companies may not have planned to fully inject the capital when established under the old Company Law. In this case, the capital reduction application is recommended to decrease the shareholders’ obligation of the subscribed capital. However, the New Company Law introduces a provision that in the event that the registered capital of a company is reduced in violation of this law resulting in losses to the company, the shareholders and the directors, supervisors, and senior management personnel who are responsible for such unlawful capital reduction shall bear the liability for compensation. And therefore, you should be cautious when attempting to exercising the capital reduction.
Supervisor / Board of Supervisors
The New Company Law introduces increased flexibility in corporate governance. For instance, it is no longer required to appoint a supervisor or a board of supervisors for small size limited liability companies. Since the New Company Law has a substantial impact on the compliance obligations and risks associated with the performance of the duties of directors, supervisors and senior management personnel, the risk exposure of the senior executives is supposed to be reduced as a result of cancelation the supervisor position.
Executive Director
Both the old Company Law and the new Company Law allow small size companies to appoint only one director rather than to form a board of directors. Under the old Company Law, the one director is called “executive director” which shows in the registration documents filed with the government authorities. While under the new Company Law, “executive director” is no longer used and the one director is renamed “director”. And therefore, the record filed with the authorities should be updated as well.
Against this background, we would recommend that you conduct a gap and opportunity analysis and take necessary measures and adjustments to be in compliant with the New Company Law. If you need our assistance in the review, please feel free to contact us.
