The Impact of Company Law Revision on the Transaction Security

The reversion of “Company Law of PRC” (“New Company Law”) has been released on Dec. 28, 2013, which cancels the requirement of the minimum amount of registered capital for those limited liabilities companies, changes the paid-in capital into the capital subscribed by the shareholders, except those industries regulated by specified regulations, and eliminates the requirements of capital verification. New Company Law will come into force on Mar. 1. 2014.

The amendments aforementioned arouse the concern and worry of enterprises on the security risk for the future transactions.

Then, what are the impacts of New Company Law on the transaction security? What are the issues shall be paid attention to in the supervision and management of transaction? Enterprises shall take these problems into consideration.

The impact of New Company Law on the transaction security is actually the difference between the protection function of the paid-in capital and the capital subscribed by the shareholders on transaction security. Under the paid-in capital system, the amount of the registered capital is a clue on identifying the ability of the counterparty in a transaction, a party may investigate on the registered capital and paid-in amount in the preliminary investigation. In other words, the party will take the amount of registered capital as the criteria on identifying the counterparty’s reputation and financial ability, actually, “registered capital” becomes a credit guarantee.

The credit guarantee can work only based on 2 fundamental conditions: (1) the registered capital has been paid; (2) the actual assert in operation does not far from the registered capital. However, in the practice, it is not rare that some shareholders require agency to fake the payment of the capital contribution, or secretly withdraw the capital contribution; meanwhile, the assert of a company may be changed because of its business, the industry environment and etc., sometimes, the assert maybe far from its registered capital. Under the capital subscribed by the shareholders system, anyone can set up a company with a huge registered capital, e.g. 50 million, the registered capital is no longer the element on identifying the transaction security. In order to control the risk of transaction, the company shall pay attention to the market structure, the qualification and credit of the counterparty.

Based on the foregoing provisions of New Company Law and its impact to transaction security, it can be predicted that the relevant authorities will release more rules and measures on the supervision of market system and credit of companies, it may mainly include: to set up or improve the search system of company’s basic information (e.g. to cancel the restriction of location, and add more items for searching by the website of SAIC); to strengthen the audit requirements and require the company to disclose the result of audit in a reasonable scope; to establish the supervision system on irregularities, litigations, etc. by SAIC, SAT, banks and courts, and disclose the relevant information.

All in all, in order to control the risk of transaction security, the company shall at least pay attention to the following aspects:

Firstly, determining the focus of investigation for individual counterparty according to the characteristic of its industry and the specified transaction, such as the shareholders’ information, assert and past transactions and etc..

Secondly, taking advantage of the supervision system of the authorities. In order to maximize the function of public resources, companies shall keep abreast of the updating investigation methods, such as the related departments, institutions, approaches, content and etc..

Thirdly, strengthening company’s internal supervision and management system on transaction security. It is highly recommended for those companies with large scale, or has more significant transactions, or more new counterparties, to establish the internal supervision department or specialist to review the transactions.