Updates on Article 88 of the New Company Law

The applicability of Article 88 has drawn some debates in practice, one of which is whether it should retroactively apply to the transfers of equity interests that have taken place before the New Company Law became effective.

On June 29, 2024 (right before the New Company Law came into effect), the Supreme People's Court of the People's Republic of China (the "SPC") issued a judicial interpretation (the "SPC Interpretation"), in which it has interpreted Article 88 in a way that it shall apply retroactively to all transfers of equity interests, including the ones took place before the implementation of the New Company Law.¹

Thereafter, we have seen cases decided by the courts according to the Article 88 as interpreted by the SPC Interpretation. One notable case is that a court in Beijing has held in a judgement that the shareholders who have transferred registered capital in a limited liability company in a series of transactions dated between April 2016 to August 2019 shall also be liable to pay the corresponding capital contribution since the current holder of registered capital has failed to pay the same (the "Beijing Case")².

Obviously the SPC Interpretation and the Beijing Case did not settle the dust. Debates went on. Most recently, on December 22, 2024, the Legislative Affairs Commission, which is the permanent body of the National People’s Congress in charge of among others reviewing existing legislations and judicial interpretations, has opined that Article 88 of the New Company Law shall not retroactively apply. Two days later, the SPC in its response to the High People's Court of Henan Province dated December 24, 2024 (the "SPC Response") confirmed that Article 88 of the New Company Law shall not be applied retroactively to disputes arising out of the transfers of registered capital took place before July 1, 2024, and any prior judicial interpretation conflicting with the SPC Response shall no longer apply.³ Apparently, the SPC Response has concluded the discussions over the retroactive applicability of Article 88.

Notwithstanding the retroactivity issue mentioned in the above, Article 88 is not without other questions, as touched in a couple of examples below.

Multiple historical transfers

It is not entirely clear based on the language of Article 88 as to how it should apply if the registered capital has been transferred for multiple times. We noted that, in an article in an academic book compiled and published by the SPC in October 2024⁴ has expressed a view that, in a case where registered capital of a limited liability company has been transferred multiple times, the transferor shareholders in all prior transfers shall bear the supplementary liability in a waterfall, such that the transferor in a more recent transfer shall be firstly liable if the transferee in such more recent transfer fails to pay its capital contribution. We also noted that the Beijing Case has followed this methodology (despite that it has applied Article 88 retroactively to a case prior to the New Company Law, which was apparently overturned by the SPC Response). That said, this issue remains to be addressed with clarity in practice, and by future legislations or judicial interpretations.

Multiple transferors in one single historical transfer

Article 88 stipulates that the transferor shareholder shall bear "supplementary liability" vis-à-vis the liability of the transferee shareholder, meaning that they are not jointly liable and one must first claim against the transferee shareholder before it goes after the transferor shareholder. That being said, Article 88 is not entirely clear in a common scenario where there are multiple transferor shareholders in one single historical transaction, and if the transferee shareholder fails to pay for the registered capital that it has purchased from such transferor shareholders, whether all transferor shareholders shall be held jointly or severally liable. Further, if the transferee shareholder has failed to pay only a portion of the purchased registered capital, is it possible for some of the transferor shareholders to argue that the specific portion that it has sold to the transferee has actually been paid up, therefore acquitting it from the supplemental liability? If so, how should it prove that? We believe that these questions also deserve a debate and clarity needs to be sought.