A client said something to me today that gave me real pause. He said that he was not too concerned about giving a large amount of credit to a Chinese company because he had looked up that company’s registered capital and it would be enough to cover the debt. He then said that he had heard that the shareholders of the company are personally liable for the amount of the registered capital.
Wrong on all counts.
Virtually all Chinese companies are limited liability entities. And though there is a stated registered capital amount (which amount can be determined through various degrees of difficulty), this is a relatively meaningless number beyond giving you an idea of how big the company is. The problem is that once a company has been capitalized, there is no way to know what will happen or has happened to the capital. Even if all that capital is still in the company, the company might owe ten times that in debt. All of this means that registered capital usually tells you nothing about the current financial condition of the company.
Shareholders are required to contribute to the company the amount of capital stated in the registered capital and their failure to do that is a crime. However, there is still no way for a creditor to do anything with that in terms of pursuing an action against a shareholder.
There is no infallible way to determine the credit-worthiness of any company with which you deal, much less one in China. But in China, like just about everywhere else, the best way is to conduct a full on due diligence review of the company.
Be careful out there.
