Capital Surplus Should Consider Creditor Interests

Xiong Jinqu

November 1st, the Ministry of Finance released a notice on the implementation of the new Company Law and Foreign Investment Law, and solicited public opinions. The notice aims to clarify issues related to using capital surplus to offset losses. As this article analyzes the issue and presents its views.

Prior to the issuance of the Company Law, it was prohibited from using capital surplus to offset company losses. Article 214 of the new Company Law, which came into effect on July 1st, stipulates that capital surplus should be used first to offset any surplus and then to offset losses. The notice aims to further clarify this regulation.

According to the regulations, a company should use its annual financial report as a basis for determining whether to use capital surplus to offset losses. If there is still a deficit after using surplus funds, it can be used to offset losses. The notice also emphasizes that the remaining balance of capital surplus should not become negative.

The company's profits and losses are closely related. As this article suggests, if the company uses all its surplus funds to offset losses, it will not have any capital surplus left for expansion or increasing registered capital. This is why it is necessary to control the use of capital surplus.

The interests of various stakeholders, including shareholders and creditors, should be maintained effectively. If a company uses up all its surplus funds to offset losses and then distributes profits, it may not fully respect the interests of other stakeholders. Therefore, it is necessary to have some control over the use of capital surplus.

The notice should be modified to specify that if a company's losses cannot be offset using surplus funds, it can use capital surplus, but only after ensuring that there are at least 50% of the original balance left. This is why it is necessary to preserve the possibility of using capital surplus to increase registered capital.

As this article suggests, a company's losses should be offset first before distributing profits. If a company has not distributed profits in previous years and now has a profit, it can use capital surplus to offset losses (this article recommends preserving at least 50% of the original balance). After offsetting losses, if there is still a remaining balance, it can be used for distribution.

In summary, using capital surplus to offset losses can help companies with negative retained earnings implement profit distribution in the future and guide them towards forming shareholder-centered concepts. However, it is necessary to consider the interests of other stakeholders and promote win-win development for all parties involved.

This column article only represents the author's personal views.