Issue 41

Case Sharing
A single character discrepancy in industrial and commercial registration may lead to vastly different practical risks. Where capital increase is misconstrued as equity transfer, can investment funds be refunded? How to strike a balance between contract termination and capital maintenance? A typical arbitration case lays bare core pain points in corporate capital increase practice.

Hosted by Lawyer Wu Simin, this learning session of the Corporate Law Committee of Cheng Gong Law Firm conducts an in-depth analysis on the validity scope of formal registration and adjudication rules for investment reimbursement based on her personally-handled arbitration dispute arising from erroneous registration of capital increase. The session reviews case merits and flaws and summarizes replicable practical strategies.



ONE
Case Review: A Capital Increase Dispute Triggered by Agency Registration Error

In 2020, investor Mr. An entered into an Equity Investment Agreement with Mr. Ta, the original shareholder of a Shaanxi-based company. The parties agreed that Mr. An would contribute RMB 1 million as capital increase to hold a 40% equity stake, with equity change registration to be processed in advance after an initial payment of RMB 250,000.

Due to operational errors by the entrusted registration agent, the industrial and commercial registration was incorrectly completed as an equity transfer instead of a capital increase:
1. The company’s registered capital remained unchanged at RMB 1 million.
2. The investor’s RMB 250,000 contribution was misclassified as equity transfer payment.
3. The foundational basis for contract performance collapsed, resulting in arbitration proceedings.

The investor filed an arbitration application seeking contract termination, full refund of RMB 250,000 together with liquidated damages and interest. The arbitral tribunal ruled to terminate the agreement and ordered the company to refund the principal sum of RMB 250,000, while dismissing all other claims.


 TWO
Judicial Enlightenment: How Formal Registration Errors Alter the Outcome of a Case

Based on the reasoning of the arbitral award, Lawyer Wu Simin summarized three core rules:


1. False Registration Undermines the Foundation of the Contract
Where an equity transfer agreement is fabricated and registration is completed under forged signatures without rectification over an extended period, frustrating the contractual purpose, the investor is legally entitled to terminate the contract.

2. Refund Available for Uncapitalized Contribution
As the capital increase was not duly registered with the market supervision authority, the RMB 250,000 was not incorporated into the company’s registered capital. No legal impediment exists to its refund since no reliance interest of creditors is involved.

3. Liability Allocated Based on Fault of Both Parties
The investor bore partial fault for unclear and untimely termination notice, for which the arbitral tribunal only ordered principal repayment and rejected claims for substantial liquidated damages and interest.
Three
Viewpoint Exchange: Summary of Core Opinions from Discussion Session

During the discussion session of the sharing seminar, lawyers exchanged views extensively on derivative practical issues arising from the case based on their respective litigation experience. Selected core viewpoints are set forth below:


1. Remedial Approaches for Erroneous Registration
View A: Errors in industrial and commercial registration are reversible. Prior to disputes, parties may apply to market regulation authorities for registration correction via shareholders' resolutions and amendment applications to prevent dispute escalation.
View B: Where arbitration or litigation has commenced, requesting registration correction as a performance remedy facilitates in-proceeding mediation to fulfil the investor’s capital increase intent, instead of immediate contract rescission and capital refund.

 2. Qualification of Funds Transferred into Corporate Accounts
View A: Even after funds are credited to the company’s account, absent completed capital increase registration and the investor’s substantive participation in corporate management or exercise of shareholder rights, such funds may be deemed loans under the guise of capital contribution or unjust enrichment rather than lawful shareholder investment.
View B: Fund flow distinguishes capital increase money from equity transfer payment: capital contributions shall be remitted directly to the corporate account while equity transfer consideration goes to original shareholders, and abnormal fund flow constitutes key evidence proving defective registration.

 3. Scope of the Investor’s Verification Obligation
View A: Investors bear reasonable due diligence to verify the authenticity and legality of registration documents and shall assume corresponding fault liability for failure to conduct timely verification resulting in registration mistakes.
View B: Investors shall not be fully liable for errors committed by registration agents. Where the investor has fulfilled reasonable examination obligations such as reviewing draft documents and confirming signing procedures, primary liability rests with the agent or original shareholders.

4. Extended Litigation Strategies for Similar Cases
View A: When representing investors, practitioners may prioritize contract termination on the ground of frustrated contractual purpose, and argue for fund refund based on incomplete capital increase registration and non-capitalization of contributed funds.
View B: When representing the target company or original shareholders, counsel may allege the investor has substantially participated in business operation and exercised shareholder rights, so procedural registration defects do not negate de facto shareholder status to defend against repayment claims.


Centered on a real case, this seminar analyzed core judicial rules governing capital increase registration and contribution refund, and generated diversified practical approaches through in-depth discussions. The Corporate Law Committee will keep focusing on prominent difficulties in corporate legal practice and organize more high-quality sharing sessions. All practitioners are welcome to follow our activities and engage in active exchanges.

Group Photo 


Speaker of This Session