Reflections on changes to China's corporate capital law

The concept of corporate capital is defined on the one hand by its paid-up share capital and other amounts of corporate profits that have been capitalised, and on the other by the form of payments that can be made out of this pool of funds. Until the 1980s, the corporation laws of the Anglo-American jurisdictions attempted to ring-fence corporate capital as a means of protecting the interests of both shareholders and creditors. This was achieved largely by limiting the activities the company could carry on through the application of the ultra vires rules to corporate actions considered to be in excess of what the memorandum of the corporation empowered it to do. The so-called capital maintenance doctrine that flowed from this approach was intended to inspire confidence in those contemplating investing in the company, including creditors and future shareholders. Some developing economies went beyond this by requiring that companies should have certain prescribed amounts of capital if they were to raise funds from the public for their business activities. The 2006 China Company Law (CCL), China's first company law, followed the latter approach and required corporations, first, to have a minimum prescribed registered capital (RMB 100,000 for sole shareholder companies, RMB 30,000 for limited liability companies, and RMB 5,000,000 for joint stock companies), of which at least 25 percent had to be in the form of cash. Secondly, companies were also required to have a minimum paid-up amount of the registered capital, and the business licences of companies had to show the paid-up capital component of the company. Thirdly, the shareholder component of the paid-up registered capital of the company had to be verified by capital verification institutions. The 2013 CCL amendments have done away with these prescriptive capital requirements. They have also simplified the company registration process. As amended, the registered capital of a limited liability company is to consist of the amount subscribed for by the company's shareholders, though in the case of a joint stock company established by share offer, all of its capital contributions have to be verified by a capital verification institution. It is now also possible to set up a company with a registered capital of RMB 1.00. While these changes align CCL with present day Anglo-American-Australian notions of capital in company law, they also raise the problems associated with thin capitalisation and the problem of excessive leverage. This article discusses this issue under the following heads. The first head discusses the sanctity of corporate capital as previously conceived and its present status; the second discusses the issue of thin capitalisation and the problem of excessive leverage; and the third reflects on the amendments to the CCL.