The Legal Effect Of Reducing Capital Due To Corporate Defects

Before the introduction of the "Company Law of the People’s Republic of China(Revised Draft)" at the end of 2021(hereinafter referred to as the "Company Law"),China’s original capital reduction system was designed to be relatively basic and lacked a complete model for identifying the effectiveness of defective capital reduction actions and assuming responsibility.Its relevant norms mainly relied on stricter prior regulatory measures to achieve the protection of creditors,And ignores the practical needs of the company’s business activities.However,after the introduction of the above-mentioned revised draft,there are still problems such as the inconsistency in the way and scope of responsibility assumption,and the lack of basis for responsibility assumption.The "Company Law(Revised Draft)" has explicitly added relevant provisions on the liability of directors and shareholders,as well as simple capital reduction.However,even though the revised draft has made some improvements to the capital reduction system,protecting legitimate creditors,respecting the legitimate business activities of the company,and assuming the responsibilities of parties involved in illegal capital reduction cannot only rely on one party in the prior and post supervision,but requires the concerted efforts of multiple parties.The ex ante regulatory norms based on the principle of maintaining corporate capital can be implemented to a high degree,which is inseparable from the good operation of the ex post creditor protection mechanism.Therefore,this article focuses on various conflicts of interest during the entire process of corporate capital reduction,especially how to resolve the conflict between the protection of corporate operating activities and the interests of creditors in the institutional design of defective capital reduction behavior.Only by fully measuring the conflicts of interest between these individuals can the defective capital reduction system become more perfect and achieve better legal effects.This article is divided into three parts.The first chapter focuses on the basic legal method of interest measurement as a starting point,focusing on various aspects of the system that need to be improved when companies reduce capital,from the formation stage of capital reduction resolutions to the implementation stage of capital reduction resolutions.It examines specific written norms and relief paths summarized in judicial practice,including various existing norms in China,And the common issues exposed in judicial practice at home and abroad,as well as relevant experience summary.At the level of effectiveness norms,there is a lack of direct norms for the effectiveness of defective capital reduction actions,and the consequences of violations should be linked to the notification process;In the context of defect notification,the impact of notification requirements on the effectiveness of capital reduction needs to be clarified;At the same time,the formation of capital reduction resolutions belongs to the internal behavior of the company,and creditors should not be involved in this process.For defective capital reduction during the execution stage,it is necessary to distinguish between acts of abuse of limited liability such as capital withdrawal.The regulatory system for defective capital reduction includes not only general provisions for company resolutions but also relevant norms related to special matters during the execution stage of capital reduction.The logic of liability assumption for defective capital reduction by companies formed through legal practice is conducive to promoting the recognition of creditors’ losses in a more fair and reasonable manner.However,there are still some problems,such as the legislative regulation,which is manifested as a single judgment basis with Article 177 of the Company Law as the core and influenced by accounting rules.The second chapter specifically measures the conflict of interest behind the capital reduction rules through the interest relationships among the company,shareholders,and directors exposed at different stages in the previous article.A simple comparison is made between the different value choices represented by the comparison of corporate capital maintenance and solvency systems in the system,as well as the relevant provisions in the comparative law.Adhering to the current principle of capital maintenance can set a bottom line for shareholders and senior management personnel to distribute company capital,and can set a clear judgment basis for improper capital reduction actions of the company,preventing shareholders and senior management personnel from wantonly damaging the interests of creditors.The third chapter summarizes the legal effects related to the defective capital reduction behavior of Chinese companies,including the identification of effectiveness and responsibility.In terms of effectiveness determination,for defects occurring during the formation stage of a capital reduction resolution,it is possible to claim that the company’s capital reduction resolution is not established or can be revoked based on the abuse of rights by shareholders who were previously in the formation stage of a capital reduction resolution,or their voting does not comply with the company’s articles of association or legal provisions.However,when a company undergoes defective actions during the execution stage of capital reduction,the procedural flaws that exist in the company do not necessarily lead to the invalidity of the entire capital reduction action.The capital reduction action becomes effective for the opposite party from the time the company makes a resolution,and it becomes publicly available upon completion of the company’s capital change registration.In terms of accountability,the discussion of accountability during the implementation phase of capital reduction is more valuable.For the defective capital reduction of the company at this stage,the company at fault or the shareholder at fault shall bear the responsibility for the return;If the corresponding return responsibility cannot be fulfilled,the responsible directors,supervisors,and other senior management personnel should bear the liability for compensation.In addition,in specific circumstances,relevant provisions should be established that the directors should directly assume responsibility to creditors;At the same time,it is also possible to appropriately increase the actual controller as the subject of responsibility for illegal capital reduction.