The Transmutation from Disqualification of Shareholders to Loss of Equity

Section 17 of Company Law Judicial Interpretation III plays an important role in urging shareholders to timely pay their capital contributions, and protecting the interests of the company and other stakeholders. However, this section applies strict conditions and mixes the two different systems of shareholder disqualification and loss of equity, which may be easily evaded or improperly used by shareholders with illegal intentions. There is no necessary connection between the qualification of shareholder and the freezing of equity, and shareholders who fail to fulfill the obligations of capital contribution can not be prevented from being disqualified as shareholders by reason of equity freezing. Section 46 of Company Law Draft Amendment makes a significant improvement on aforesaid section 17 by introducing for the first time the wording of loss of equity, detailing the procedures for calling in capital contributions and standardizing the treatment of loss of equity. In essence, section 46 clarifies the logical relationship between shareholder qualification and equity, but it still needs further explanation in the implementation of the principle of shareholder equality, the distribution of power in the company and the responsibility of shareholders who lose their equity.