China Issues Judicial Interpretations on New Company Law’s Scope of Application and Effective Period

Posted by Written by Qian Zhou Reading Time: 6 minutes

The Supreme People’s Court of China has issued judicial interpretations regarding the application and effective period of the New Company Law. While adhering to the principle that laws do not apply retroactively, the Interpretations clarified situations where provisions of the New Company Law prevail. 

China’s Supreme People’s Court (SPC) has issued judicial interpretations regarding the temporal effect of the New Company Law (the Interpretations). The Interpretations take effect on July 1, 2024, alongside the implementation of the New Company Law.

As a fundamental regulation overseeing corporate governance in China, the New Company law introduced significant changes to the legal landscape for businesses, including foreign invested enterprises. Understanding how the New Company Law applies in conjunction with the old laws is pivotal.

The Interpretations provide specific guidelines for determining the temporal effect of the New Company Law in current judicial proceedings.

What is included in the Interpretations?

While adhering to the principle that laws do not apply retroactively, the Interpretations differentiate between substantial amendments, new provisions, and more detailed regulations of the Company Law.

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The Interpretations consist of eight articles, covering general provisions on the temporal effect of the Company Law, favorable retroactive rules for civil legal acts, favorable retroactive rules for contract performance, blank retroactive rules for new provisions, specific retroactive application rules for more detailed regulations, legal application for liquidation responsibilities, rules regarding final judgments prioritizing over retroactive rules, and the effective date.

General provisions

After the implementation of the New Company Law, civil disputes arising from legal facts shall be governed by the provisions of the New Company Law.

Before the implementation of the New Company Law, civil disputes arising from legal facts shall be governed by the laws and judicial interpretations in effect at that time.

Retroactive rules for better legal purposes

Where applying the New Company Law is more conducive to achieving the legislative purpose of the law, the following provisions of the New Company Law shall apply in corresponding situations that occurred before the implementation of the New Company Law:

Corresponding situations occurred before the implementation of the New Company Law Applicable provisions of the New Company Law
Before the implementation of the New Company Law, the shareholders’ meeting was improperly convened and shareholders who were not notified to attend the meeting request the court to revoke the resolution within one year from the date of the resolution Article 26, Paragraph 2:

Shareholders who were not notified to attend the meeting can request court revocation within one year from the resolution date.
Shareholders’ meeting resolutions or board resolutions made before the implementation of the New Company Law are confirmed by the court to be invalid, and disputes arise regarding the legal relationships formed by the company based on those resolutions Article 28, Paragraph 2:

Disputes arising from legal relationships formed based on resolutions confirmed as invalid.
Shareholders’ capital contributions are disputed due to disagreements over the method of contribution before the implementation of the New Company Law Article 48, Paragraph 1:

Pertains to capital contribution methods.
Disputes arising from the transfer of equity by shareholders of a limited liability company to parties other than shareholders before the implementation of the New Company Law Article 84, Paragraph 2:

Pertains to rules regarding equity transfer to parties other than shareholders

 
Disputes arise regarding compensation liability due to the company violating legal provisions by distributing profits to shareholders or reducing registered capital before the implementation of the New Company Law Articles 211 and 226:

Pertains to rules regarding compensation claims.
Disputes over the time limit for profit distribution resolutions made before the implementation of the New Company Law Article 212:

Pertains to profit distribution timing.
Shareholders dispute the corresponding reduction in capital contributions or the number of shares when the company reduces its registered capital before the implementation of the New Company Law Article 224:

Pertains to rules regarding capital reduction.

Retrospective rules for those deemed invalid under the old laws

Regarding civil legal acts related to the company before the implementation of the New Company Law, if they were deemed invalid based on the laws and judicial interpretations at that time but are considered valid under the New Company Law, relevant provisions of the New Company Law shall apply in following situations:

Corresponding situations occurred before the implementation of the New Company Law Applicable provisions of the New Company Law
Dispute over the effectiveness of an agreement where the company assumes joint liability for debts of the invested enterprise Article 14, Paragraph 2:

If it is prescribed by any law that a company shall not become a capital contributor that shall bear the joint and several liability for the debts of the enterprises it invests in, such provisions shall prevail.

 
Disputes regarding the effectiveness of company resolutions using capital reserve funds to offset losses made Article 214:

Pertains to rules related to company resolutions using capital reserve funds to offset losses.
Disputes over the effectiveness of merger resolutions with over 90 percent shareholding Article 219:

Pertains to rules regarding merger resolutions involving companies with over 90 percent shareholding.

Retrospective rules regarding contract performance

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Contracts related to the company that were entered into before the implementation of the New Company Law and whose performance continues after its implementation shall be governed by the provisions of the laws and judicial interpretations in effect at that time for disputes arising from pre-implementation performance.

However, for disputes arising from post-implementation performance, the following situations shall be governed by the provisions of the New Company Law:

Corresponding situations occurred before the implementation of the New Company Law Applicable provisions of the New Company Law
Contract for holding shares of a listed company on behalf of others Article 140, Paragraph 2
Contract for a controlling subsidiary of a listed company to acquire shares of that listed company Article 141
Contract in which a limited liability company provides gifts, loans, guarantees, or other financial assistance to third parties for acquiring shares of the company itself or its parent company Article 163

Blank retroactive rules for new provisions

Regarding civil disputes arising from legal facts before the implementation of the New Company Law, where there were no specific provisions in the laws or judicial interpretations at that time but the New Company Law subsequently made provisions, the following situations shall be governed by the provisions of the New Company Law:

Corresponding situations occurred before the implementation of the New Company Law Applicable provisions of the New Company Law
Shareholders transfer shares before the end of the contribution period, if the transferee fails to make the full contribution within the specified period, the determination of the responsibilities of the transferor and transferee Article 88, Paragraph 1
Abuse of shareholder rights by controlling shareholders of limited liability companies: When such abuse significantly harms the company or other shareholders’ interests, and other shareholders request the company to purchase their shares at a reasonable price Article 89, Paragraphs 3 and 4
Shareholders who vote against resolutions at shareholders’ meetings of a joint-stock company: If they request the company to purchase their shares at a reasonable price Article 161
Civil liability determination for controlling shareholders or actual controllers who do not serve as company directors but execute company affairs Article 180
Civil liability determination when the company’s controlling shareholders or actual controllers instruct directors or senior executives to engage in activities that harm the company or shareholders’ interests Article 192
Other situations not clearly deviating from the reasonable expectations of relevant parties Corresponding provisions

Retrospective rules for those having more detailed provisions under the New Company Law

Regarding civil disputes arising from legal facts before the implementation of the New Company Law, where there were no specific provisions in the laws or judicial interpretations at that time, but the New Company Law subsequently made provisions, the following situations shall be governed by the provisions of the New Company Law:

Corresponding situations occurred before the implementation of the New Company Law Applicable provisions of the New Company Law
Disputes arise from restrictions on share transfer in the articles of association of a limited liability company Article 157
Compensation determination for prohibited acts by company supervisors, including embezzlement of company funds, illegal related-party transactions, improper acquisition of company business opportunities, and restrictions on similar business Article 181, Article 182 (Paragraph 1), Article 183, and Article 184
Compensation determination for improper acquisition of company business opportunities or restrictions on similar business by company directors and senior executives Article 183 and Article 184
Determination of the scope of related entities and the nature of related transactions Article 182 and Article 265 (Item 4)

Retrospective rules for company liquidation matters

When legal facts requiring liquidation occurred before the implementation of the New Company Law, disputes arising from liquidation responsibilities shall be governed by the provisions of the laws and judicial interpretations in effect at that time.

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If the legal facts requiring liquidation occurred before the implementation of the New Company Law but within 15 days from the implementation date, the provisions of Article 232 of the New Company Law apply. The deadline for the liquidation obligation shall restart from the New Company Law’s implementation date.

Clarification regarding final judgments prioritizing over retroactive rules

For civil disputes that have already been finally adjudicated before the implementation of the New Company Law, Article 7 of the Interpretations clarified that if the parties apply for retrial or if the People’s Court decides on a retrial according to the trial supervision procedure, the provisions of the laws and judicial interpretations in effect at that time shall apply.

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Disclaimer
The information provided is for general purposes only and may not account for local variations. No liability is assumed for the completeness or accuracy of the information. For personalized advice on specific business queries, consult our experts at Dezan Shira & Associates by emailing China@dezshira.com.

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