Analysis on the Responsibility of Former Shareholders for Transfer of Equity Right Before the Investment Term

Author | Zhiheng Corporate Legal Affairs Center Attorney Zhou Yanjun

Origin of the Issue

Prior to the promulgation of the 2023 Company Law (hereinafter, unless otherwise specified, “the 2023 Company Law”), although some judicial precedents in practice have held that a former shareholder who transfers equity before the capital contribution deadline is liable for the company’s debts, the criteria for such liability have been stringent, generally requiring a finding of malicious acts aimed at evading debt.

However, after the enactment of the Company Law, paragraph 1 of Article 88 sparked widespread controversy. Based on this provision, following the implementation of the Company Law on July 1, 2024, case law has consistently held that all prior shareholders are jointly and severally liable to bear supplementary liability for the obligations of subsequent shareholders. This judicial approach has sparked considerable controversy. On December 24, 2024, the Supreme People’s Court clarified, in the form of an official reply, that Article 80, paragraph 1, of the Company Law does not apply to equity transfer transactions involving subscribed capital that had not yet reached its payment deadline prior to July 1, 2024.

Nevertheless, the author believes it remains necessary to discuss the scope of liability of the former shareholder under Article 80, paragraph 1, of the 2023 Company Law in cases where equity is transferred before the capital contribution deadline has arrived.

The author's viewpoint

With regard to the application of Article 80, paragraph 1, of the Company Law, the author submits that only the immediate predecessor shareholder of the current shareholder should bear supplementary liability for the latter’s capital contribution obligations. Unless the shareholders preceding that one (hereinafter referred to as “historical shareholders”) engaged in acts such as malicious evasion of debts or transferred their equity interests when the capital contribution was due and payable ahead of schedule, the historical shareholders should not be construed as subjects bearing supplementary liability for the current shareholder’s capital contribution obligations under Article 88, paragraph 1, of the Company Law.

Reason Analysis

1. Article 88, paragraph 1 of the Company Law should be interpreted according to its literal meaning.

Article 88, paragraph 1 of the Company Law provides as follows: Where a shareholder transfers equity corresponding to subscribed capital that has not yet reached its payment deadline, the transferee shall assume the obligation to pay such capital; if the transferee fails to pay the capital in full and on time, the transferor shall bear supplementary liability for the unpaid portion. The first half of this provision clearly states: when a shareholder transfers equity for which the capital contribution deadline has not yet arrived, the obligation to make the capital contribution is transferred to the transferee, meaning the transferor is no longer liable for such obligation.

The second half of the sentence follows from the first: if the transferee fails to make its capital contribution in full and on time, the transferor shall bear supplementary liability for the transferee’s capital contribution.

However, it is well known that the transferor is defined in relation to the transferee. In cases where equity interests have been transferred multiple times, the capital contribution obligations of the historical shareholders have also been transferred to their respective transferees, with the ultimate obligation resting with the current shareholder. In other words, the previous shareholder is no longer obligated to contribute capital. The previous shareholder bears subsidiary liability for the capital contribution obligations owed to the current shareholders.

Therefore, for historical shareholders, the preceding shareholder has no obligation to contribute capital, and the basis for the historical shareholders’ supplementary liability no longer exists.

Therefore, based on the plain meaning of the statutory provision, the author believes that historical shareholders other than the transferor—namely, the immediate prior shareholder vis-à-vis the current shareholders—should not be held liable solely pursuant to Article 88, paragraph 1, of the Company Law.

2. Analysis of the provisions in the Company Law regarding shareholders' capital contribution obligations

The fundamental provision of the Company Law regarding capital contributions is Article 49, which stipulates that shareholders shall, in accordance with the schedule and in full, pay the respective subscribed capital contributions as specified in the company’s articles of association. The term “on schedule and in full” implies that, prior to the expiration of the contribution deadline, shareholders are entitled to the benefit of the time limit and thus have no obligation to contribute capital. Unless there are circumstances under which the capital contribution becomes due and payable in advance.

At the same time, the Company Law does not restrict shareholders from transferring subscribed equity interests for which the capital contribution deadline has not yet arrived; in other words, the Company Law permits shareholders to transfer their capital contribution obligations and withdraw from the company by way of such transfers. Following the transfer of equity interests by a shareholder, the company’s articles of association are amended accordingly, and the former shareholder is no longer liable for any capital contribution obligations; such obligations are assumed by the new shareholder.

After a former shareholder transfers its equity interest, and in the absence of any legally prescribed “fault,” it shall no longer bear liability to the company or the company’s creditors. After all, the company has already consented to the shareholder’s transfer of equity and withdrawal.

Therefore, from the perspective of the nature of equity transfer, the former shareholder no longer has any capital contribution obligations to the company.

3. A horizontal comparison with the responsibilities of the initiator.

Article 50 of the Company Law stipulates the joint and several liability of the promoters. According to the prevailing view, the scope of the joint and several liability of promoters is limited to the subscribed capital that they were required to contribute upon the company’s incorporation—namely, the portion that was due at the time of establishment but remained unpaid. It does not encompass the promoters’ unfulfilled subscription commitments, nor does it include subscription obligations assumed through the acquisition of equity interests.

In a horizontal comparison with the liability of the promoter, if all former shareholders who transfer equity before the capital contribution deadline are held liable for the ultimate transferee’s capital contribution obligations, regardless of how many times the equity has been transferred, such liability would undoubtedly be excessively onerous.

4. The need to balance the interests of the company, creditors, and shareholders.

Both the company and its creditors, as commercial entities, should reasonably bear their respective business risks. Imposing unlimited liability for the company’s capital contributions on all former shareholders would significantly tilt the balance of interest protection under the Company Law.

After a shareholder transfers his or her equity and exits the company, the company’s operations are no longer related to the former shareholder, who can no longer exert any influence over or affect the company’s management. Consequently, the former shareholder has no obligation to bear liability for the company’s business activities. However, in order to prevent former shareholders from “passing the buck” through equity transfers and to appropriately regulate their liability, thereby striking a balance between the rights of former shareholders and the interests of the company and its creditors, such measures are both understandable and acceptable; this is precisely the intended meaning of Article 88, paragraph 1 of the Company Law.

However, while imposing unlimited liability on all former shareholders for the company’s capital contributions would undoubtedly facilitate the fulfillment of capital commitments and better protect creditors’ interests, it also raises concerns about over‑protection of the company’s interests—particularly those of creditors. Both the company and the creditors shall bear the risks they may encounter and the liabilities arising from their own actions.

The will of the company is the collective expression of the will of its current shareholders, and creditors are entitled to a legitimate expectation interest only with respect to the subscribed capital contributions made by the shareholders at the time their claims arose. Meanwhile, the former shareholder has long since withdrawn from the company; as a result, they no longer have the basis for being held liable for the consequences of their actions arising from their participation in corporate governance, nor are they aware of the company’s operational status.

Therefore, neither the company nor its creditors may hold former shareholders liable for capital contributions; such liability may only be extended to former shareholders if they were at fault. This approach not only urges the company and its creditors to exercise prudence in their operations but also helps strike a balance among the interests of the company, its creditors, and the former shareholders.

Response to the reasons against the views presented in this article

Counterargument 1:

May contravene the principle of capital maintenance or be detrimental to the company’s interests.

When a shareholder transfers equity, the new shareholder assumes the capital contribution obligation with the company’s knowledge and consent (otherwise, the industrial and commercial change registration procedures cannot be completed); the company’s capital contribution obligation remains with the current shareholders. Although there may be cases where the current shareholder lacks the financial capacity to contribute capital, given that the current shareholder is selected by the preceding shareholder, the latter should, when choosing the transferee, take into account whether the transferee has the ability to fulfill the capital contribution obligation. Therefore, holding the preceding shareholder subsidiarily liable can “compel” the transferor to exercise due diligence in selecting the transferee, while also preventing the preceding shareholder from shifting responsibility onto others.

Furthermore, in theory, all subscribed shareholders may lack the ability to contribute capital. If this deficiency must be remedied, one option is to revert to a paid-in capital system, or alternatively, require the subscribed shareholders to provide guarantees.

Counterargument 2:

May harm the interests of creditors

Some argue that holding only the immediate prior shareholder liable is not conducive to protecting the interests of creditors. Because as long as the shares are transferred one more time, the historical shareholders can exit. However, if the creditor’s claim had not yet arisen when the historical shareholder transferred the equity interest, the creditor would have no legitimate expectation of benefit from that historical shareholder. If, on the other hand, the creditor’s claim had already arisen at the time of the equity transfer, the legal doctrine of “malicious avoidance of debt” can be invoked to close this loophole, thereby enabling the creditor to hold the historical shareholder liable by establishing that the transfer was undertaken with the intent to evade debt.

Conversely, as previously noted, holding former shareholders who have long since left the company strictly liable without any limitations would undoubtedly impose an unreasonable burden, thereby disregarding the interests of those historical shareholders in the name of protecting creditors’ interests.

Objection Three:

May violate the principle of equivalence between rights and obligations.

Some have argued that the former shareholders did not contribute any capital yet still reaped the benefits during the period they held their shares. Therefore, it is necessary to hold all former shareholders personally and indefinitely liable for the obligation to make up any shortfall in capital contributions. The author does not endorse this view, for the following reasons: First, the Company Law permits the subscribed capital system and allows the transfer of subscribed equity interests; moreover, it does not impose any restrictions on the rights associated with such subscribed equity (instead, it leaves the decision of whether to restrict the rights of subscribers to the company’s articles of association).

Secondly, the former shareholder has, in fact, also borne the risk that liabilities may arise during the period of shareholding, potentially requiring them to make early contributions or bear the company’s operating losses. Third, if a former shareholder received dividends during the period of shareholding but did not actually contribute capital, thereby creating an imbalance in rights and obligations, then, when applying Article 88, paragraph 1 of the Company Law, the former shareholder’s liability should be determined based on whether dividends were received and the proportion of such dividends.

Evidently, current judicial practice does not, without exception, hold former shareholders liable based solely on the distribution of dividends.

Counterargument Four:

If only the immediate prior shareholder is held liable, it could be exploited for malicious debt avoidance.

As mentioned earlier, if a former shareholder transfers their equity and exits the company after the debt arises, they may be held liable under the “malicious avoidance of debt” exception, thereby addressing this loophole. However, if all former shareholders were held liable without any limitations, this approach would also have its “loopholes”: the current shareholders, who are in actual control of the company, could, if they do not wish to bear the debts incurred during their management, transfer the company’s assets and leave those debts with the company through various seemingly legitimate business practices, thereby ensuring that the former shareholders ultimately assume such liabilities while the current shareholders walk away unscathed.

Therefore, the claim to hold all former shareholders liable on the ground that they might be exploited to evade debt is not tenable.

Summary

In summary, with respect to the scope of a former shareholder’s supplementary liability for transferring equity before the capital contribution deadline has arrived, such liability should be limited to the immediate predecessor shareholder of the current shareholder, rather than all prior shareholders.

Author

Introduction

Zhou Yanjun

Partner at

Secretary-General of the Zhiheng Corporate Legal Affairs Center

Member of the 11th Shenzhen Social Security Professional Committee

Attorney Zhou Yanjun specializes in legal matters such as creditor–debtor disputes, contract disputes, and corporate and equity law. He has handled hundreds of civil and commercial disputes and provided legal services to dozens of enterprises. He excels at developing tailored legal risk‑management strategies based on the specific circumstances of each company and possesses unique insights into corporate legal risk prevention, equity structure design, and equity‑based incentive schemes.

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