The new Company Law of the PRC, which came into effect on 1 July 2024, has revised the rules for capital reduction. The new rules for capital reduction are as follows:

1. Substantive Capital Reduction
   
   Substantive capital reduction refers to the substantial reduction of a company's registered capital and the reduced registered capital will be refunded to the shareholders or the shareholders will be exempted from the obligation to contribute capital or share payments. According to Article 224 of the Company Law of the PRC, substantive capital reduction shall be conducted in accordance with the following statutory procedures:
   
   

   (1)	The board of directors formulates a capital reduction plan.
   (2)	The shareholders’ meeting adopts a resolution on capital reduction.
   (3)	The board of directors prepares balance sheets and assets inventories.
   (4)	The company shall notify its creditors within 10 days upon issuance of the shareholder resolution on capital reduction and make a public announcement in a newspaper or the National Enterprise Credit Information Publicity System within 30 days.
   (5)	The company pays off debts or provides guarantees upon the request of the creditors.
   (6)	The company shall apply for change of registration with the registration authority 45 days after the public announcement.

   
   
2. Pro Forma Capital Reduction
   
   Pro forma capital reduction refers that a company offsets the remaining losses by reducing its registered capital after using discretionary reserve, statutory reserve and capital reserve to make up losses in accordance with Article 214 of the Company Law of the PRC. Neither the company shall refund any capital contributions to the shareholders nor the shareholders be exempted from the obligation to contribute capital or share payments through pro forma capital reduction. According to Article 224 of the Company Law of the PRC, substantive capital reduction shall be conducted in accordance with the following statutory procedures:
   
   

   (1)	The board of directors formulates a capital reduction plan.
   (2)	The shareholders’ meeting passes a resolution on capital reduction.
   (3)	The board of directors formulates a balance sheet and a checklist of properties.
   (4)	The company shall make a public announcement in a newspaper or in the National Enterprise Credit Information Publicity System within 30 days upon issuance of the shareholder resolution on capital reduction.
   (5)	The company applies for change of registration with the registration authority.

   
   
3. Proportionate Capital Reduction and Exception
   
   According to Article 224 of the Company Law of the PRC, when a company reduces its registered capital, it shall be reduced in proportion to the shareholders’ contributions or shareholdings in principle. However, the capital reduction can be conducted in a non-proportional manner if the law stipulates otherwise, all shareholders of a limited liability company agree otherwise, or the articles of association of a joint-stock company specify otherwise.
   
   
4. Legal Consequences of Illegal Capital Reduction
   
   According to Article 226 of the Company Law of the PRC, if a company reduces its registered capital in violation of the Company Law, the shareholders must return any funds received and the reduction in the shareholders’ contributions must be reinstated. If the company suffers any losses, the shareholders, any directors, supervisors and senior officers responsible for the violation shall be liable to compensate the company.
   
   Meanwhile, according to Article 255 of the Company Law of the PRC, if a company fails to notify its creditors or make public announcement in accordance with the Company Law when reducing its registered capital, it will receive demand for correction from the registration authority and be fined between RMB10,000 to RMB100,000.
   

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