The new Chinese Company Law, effective from July 1, 2024, introduces significant changes to corporate governance, with Article 88 being a focal point. This provision directly impacts the responsibilities of shareholders in equity transfers involving unpaid subscribed capital, sparking considerable debate.

Article 88 of the new Company Law provided as follows:

"Where a shareholder transfers shares with subscribed capital that has not yet reached the capital contribution deadline, the transferee shall assume the obligation to pay the contribution. If the transferee fails to make the contribution in full and on time, the transferor shall bear supplementary responsibility for the contribution that the transferee has failed to pay on time."

Retroactivity Debate and Judicial Interpretation

Although the Legislation Law in China stipulates the principle of non-retroactivity, judicial interpretations extended Article 88 to disputes from equity transfers predating the law's enactment if previous laws lacked specific provisions.
Critics argue that such retroactive applications disrupt historical transactional stability, potentially leading to unexpected liabilities for prior shareholders and an influx of litigation. This retroactivity provision is considered particularly contentious.

Legislative Response and Clarification

Public concerns led the National People’s Congress Standing Committee to affirm that non-retroactivity is a fundamental legal principle. The Supreme People's Court subsequently clarified that disputes arising from equity transfers before July 1, 2024, would be governed by the spirit of the old Company Law rather than the new provisions.

Implications for Historical Equity Transfers

Despite the clarified non-retroactivity, courts may still hold prior shareholders accountable in specific scenarios, such as:
· Collusion between the transferor and transferee.
· Intentional harm to creditors' interests.
In such cases, judicial discretion will ensure fairness while balancing the interests of creditors and former shareholders.

Practical Considerations

The clarification of Article 88 establishes clearer expectations for shareholders in equity transfers. Shareholders are advised to ensure thorough due diligence in future transactions. Legal professionals should monitor ongoing judicial developments to guide corporate practices under the new law..