Verifying Chinese Registered Capital Amounts

December 9, 2009 Posted by China Briefing Reading Time: 3 minutes

Part 2 in our series: Understanding Chinese Limited Companies

Dec. 9 – As mentioned yesterday in an article on Chinese company business licenses, all businesses in China are required to demonstrate their registered capital amounts on their business license. While this is strictly monitored for foreign investors, the Chinese authorities are somewhat lax when it comes to the monitoring of registered capital payments to fund Chinese companies. This is due to a procedural structure that permits the issuance of the business license, complete with the required registered capital amounts being shown, prior to the registered capital amount actually being contributed in full as current banking administration and account set-up process require the business license in hand prior to establishing a bank account and receiving the registered capital.

Accordingly, there are cases of Chinese companies possessing a business license with a registered capital amount displayed that have not actually made the capital injection. Additionally, such capital may have been withdrawn, although this will not affect the legal limited liability status, it does impact upon the business’s solvency.

It is important for the foreign buyer, seller or potential joint venture partner to be aware of these circumstances and to make additional checks to verify whether or not the registered capital demonstrated on the business license has in fact been met, not least as this amount is also representative of the company’s limited liability status. In such instances, it is prudent to request a copy of the capital verification certificate to ensure that the money was in fact injected. This should be obtained from the company concerned.

The capital verification certificate is issued by the company’s bank only after the registered capital amount has been deposited with them. To ensure due diligence, limited liability status and to satisfy issues concerning the provision of credit lines, it is important that not only a copy of the business license is obtained and the registered capital identified, but also the capital verification certificate is also provided for inspection. The most recent capital verification certificate should be asked for, or a new one requested. The bank dates these documents and the company should be able to provide a recent or new one to you upon requesting it from their bankers.

Requesting a new capital verification certificate will also verify that the capital is still in the account and has not been withdrawn. In cases we have undertaken in conducting due diligence for clients we have often uncovered instances that after the registered capital injection, a portion of this has been withdrawn. This can be indicative of trading problems and also creates a large amount of receivables to be kept in the financial books of a target company under acquisition circumstances.

Richard Hoffmann is a senior legal associate with Dezan Shira & Associates and is based in Beijing. The firm has nine offices in mainland China and has been operating in Asia since 1992. Please contact Richard for advice on corporate establishment, contractual, or due diligence issues within China.

Further Reading:
China Briefing Magazine
Setting Up in China
Are You (Really) in Control of Your China Operations?