Father Wins Appeal Over CNY 500,000 Company Capital Dispute

A father and son became locked in a legal battle over who truly funded the registration capital of a scrap metal recycling company. The dispute arose after the father, a retired supply and marketing cooperative official, claimed that he provided the entire 500,000 CNY used to incorporate the business. The lower court ruled in favor of the father, ordering the son to repay the amount. The son appealed, arguing that the funds came from a previous company’s proceeds held by the father. The appellate court upheld the original decision, confirming the father as the true investor.

The father, Mr. Lu (the father), and his son, Mr. Lu (the son), had worked together in scrap metal recycling since 2004. In early 2005, they decided to establish a limited liability company. According to the record, the father arranged for deposits to be made into a bank account opened in the name of a relative, Mr. Lu Jie. Between February 7 and February 25, 2005, a total of 533,000 CNY was deposited from various sources, including the father’s own hand and a transfer from his son-in-law. On March 2, 2005, the father withdrew 500,000 CNY from that account and deposited it into the company’s verification account. The company was registered with a registered capital of 500,000 CNY, and the son was listed as legal representative and general manager, while the father served as accountant. In November 2008, the father suffered a stroke and stopped working. Family disputes followed, culminating in a settlement agreement in May 2009 under which the son paid the father 353,075 CNY for labor services. The father later sued, claiming that the 500,000 CNY registration capital belonged to him and should be returned.

During the hearing, the father presented bank deposit slips, account records, and witness testimony showing that the 500,000 CNY originated from accounts under his control. The son argued that the 500,000 CNY came from funds of a previous company that the father was holding, and that the father was merely an employee of the new company. The son also pointed to the 2009 settlement agreement, which he claimed resolved all financial matters between them. The son further presented corporate documents such as shareholder lists, meeting minutes, and the capital verification report, all of which listed other individuals as shareholders. However, the father countered that these individuals were nominal shareholders who had not actually contributed capital. The court also considered the fact that the father had handled the entire verification process and that the son could not produce any evidence of his own capital contribution.

The court found that the father had proven by clear evidence that the 500,000 CNY deposited into the company’s verification account was his own money. The bank records showed that the funds came from the account in the name of Mr. Lu Jie, and the father demonstrated that those deposits were his personal funds. The court noted that the nominal shareholders listed in the corporate registry had not provided any evidence of contributing capital. Therefore, the father, who actually provided the capital, was the real shareholder. The court also held that the 2009 settlement agreement did not address the capital contribution issue, as it focused on labor compensation and certain debts. Since the father had been incapacitated by illness and could no longer participate in management, his equity interest was effectively transferred to the son. The son’s refusal to return the capital was seen as acceptance of that transfer. The court ordered the son to repay 500,000 CNY to the father.

The legal analysis turned on the distinction between nominal shareholders and actual contributors. Under applicable Chinese company law, the person who makes the capital contribution is entitled to the shareholder rights, regardless of the name on the registry. The court applied the principles of property law and civil law to protect the father’s ownership of the funds. The court also clarified that a shareholder cannot withdraw capital from the company, but equity can be transferred. In this case, the father’s transfer of control to the son after his illness effectively constituted a transfer of equity. The son’s failure to pay the father for the capital contribution was therefore unjust. The court rejected the son