A warning sign not to be ignored, but also solutions for recovery
Losing half of a company’s share capital is a warning sign of its financial fragility. However, this situation does not necessarily mean that the company is in irremediable difficulty. Company law provides a procedure (very important for the director) designed to inform the shareholders, allow them to decide on the company’s future, and, if possible, restore its financial health.
I- WHAT IS THE LOSS OF HALF OF THE SHARE CAPITAL?
The loss of half of the share capital refers to the situation in which, « due to losses recorded in the accounting documents, the company’s equity falls below half of its share capital. » This is a matter of public policy that reflects the company’s actual financial situation and its theoretical ability to meet its obligations. For this purpose, the nominal amount of the share capital must be taken into account:
- whether paid up or not;
- whether amortized or not;
- as of the balance sheet date.
Equity corresponds to:
- capital and reserves;
- undistributed profits from previous financial years;
- profit for the financial year;
- regulated provisions;
- deducting losses.
Example:
- The company’s share capital is €5,000, and it has recorded losses of €8,000;
- its reserves amount to €2,000;
- its undistributed profits from prior years amount to €2,000;
- its regulated provisions are €1,000.
In this case, the equity of Company A amounts to €2,000, [(Share capital of €5,000 + reserves of €2,000 + undistributed prior year profits of €2,000 + regulated provisions of €1,000) – losses of €8,000].
However, half of Company A’s share capital is €2,500 [Share capital of €5,000/2].
Therefore, in this case, Company A’s equity is less than half of its share capital.
II- WHICH COMPANIES ARE INVOLVED?
The procedure for losing half of the capital mainly concerns commercial companies, namely:
- SARL and EURL;
- SA;
- SAS and SASU;
- SCA;
- SELARL and SELAS.
However, partnerships (SNC, SCS and SCI) are not subject to this system.
This regulation also does not apply to companies that are subject to safeguard proceedings, judicial administration or liquidation.
III- WHAT IS THE PROCEDURE TO FOLLOW? AND WHAT FORMALITIES NEED TO BE COMPLETED?
If equity falls below half of the share capital, the company must follow a specific procedure which includes the following steps:
1- Consultation with Partners:
The company’s director must organize a consultation with the partners or shareholders (extraordinary general meeting). This consultation concerns the advisability of dissolving the company.
This consultation must take place within four months of the approval of the financial statements that revealed the loss.
NOTE: Failure to consult in the event of a loss of half of the share capital may be subject to criminal penalties.
2- Collective decision of the partners:
During the extraordinary general meeting, the partners must vote for or against the dissolution of the company. Therefore, it is the rejection of the dissolution that allows the company’s operations to continue.
The majority and quorum requirements vary depending on the legal form of the company.
NOTE: Concerning EURL, all the powers usually vested in the shareholders’ meeting in a SARL belong to the sole shareholder, who makes unilateral decisions. There are no rules regarding convening meetings, voting procedures, or quorum requirements. However, each decision must be recorded in a special register kept at the company’s registered office.
3- Publication in a legal notices publication:
The decision made (dissolution or continuation of business) must be published in a publication authorized to receive legal notices in the department where the company’s registered office is located, in order to inform third parties of the company’s developments.
The legal notice must be published within one month of the decision being made.
4- Business Formalities Registration:
The decision must be registered on the Business Formalities website.
Following this procedure, the loss of half of the share capital is recorded on the company’s KBis extract.
NOTE: These registration formalities do not need to be repeated each fiscal year, even if equity remains below half of the share capital.
IV- HOW CAN THE SITUATION BE RECTIFIED?
If the decision is made to continue operations, the company has two years to rectify its situation. This period begins from the date of the Annual General Meeting that approved the financial statements for the previous fiscal year and revealed the loss.
The company has several options for replenishing its equity to a value at least equal to half of its share capital:
- Generate sufficient profits to absorb losses;
- Increase share capital: the company by asking shareholders to inject new funds or seeking new capital providers;
- Debt forgiveness: the partners decide to waive the repayment of the sums they have made available to the company in current account;
- Capital reduction mitigated by losses: the capital is reduced by the amount necessary to ensure that the losses do not exceed half of the share capital. The withdrawn shares will be used to offset part of the losses incurred instead of being reimbursed to the shareholders;
- To carry out a so-called « accordion operation »: this method consists of reducing and then increasing the capital (or vice versa) in a very short period of time.
NOTE: These different processes can be combined.
V- OUTCOME OF THE PROCEDURE:
1- The situation has been rectified:
The partners must request an amendment to the registration with the clerk’s office so that the mention of the capital loss no longer appears on the Kbis extract.
2- The situation has not been rectified:
If the company has not restored its equity by the deadline, any interested party may request the company’s dissolution. But the dissolution of the company cannot be requested if the capital of the company in difficulty is greater than an amount of 1% of the total balance sheet (or the legal minimum of the share capital provided for the legal form, in particular for SA and SCA, if this is higher).
The company is then granted a second period (until the end of the second financial year following the first deadline) to reduce its share capital to a value equal to or less than the threshold defined above (1% of total assets). Only if the share capital has not been reduced by the end of this second period can the company be dissolved at the request of any interested party.
If the company has not restored its equity by the end of the first period and the capital is less than the threshold of 1% of the total balance sheet, the partners must reduce the capital by an amount necessary so that the value of the equity is at least equal to half of the share capital.
3- The partners decide to dissolve the company early:
In this case, the holding of the extraordinary general meeting to decide on the dissolution can be carried out without convening the partners, directly following the ordinary general meeting concerning the loss of half of the share capital.
NOTE: Company directors can be held civilly liable if it is proven that their inaction prevented the situation from being rectified.
The loss of half the capital is primarily a warning mechanism designed to protect shareholders and third parties. Adherence to the procedure is extremely important. The faster the reaction, the more solutions are available and the less costly they are.
