When setting up a business, it is necessary to provide the company with certain resources, i.e., among other things, to contribute the appropriate capital required to fully pay for the shares issued.
The need to recapitalise the company may also arise later, and one of the forms available is an increase in share capital and the related contribution to cover it.
Such contributions may take the following forms:
- Cash contributions
- Non-monetary contributions (contributions in kind), i.e. things and rights that are capable of being contributed
Depending on the type of company, the rules on restrictions and obligations regarding contributions in kind may differ.
Contributions in kind – Contributability
Contributability is defined as the quality of things and rights that makes them capable of being contributed to a company as a contribution in kind.
At the same time, the Commercial Companies Code explicitly states that a non-transferable right or the provision of work or services cannot be contributed to a limited liability company or a joint stock company (Article 14(1) of the Commercial Companies Code).
The regulations also specify what cannot be a contribution in kind.
In practice, a contribution in kind should be:
- An existing asset
- Transferable
- Capable of being valued and being included as an asset in the company’s balance sheet
- Capable of being the object of direct enforcement proceedings in order to satisfy creditors’ claims
Contributions with defects
In accordance with the Commercial Companies Code, if a shareholder makes a defective contribution in kind, the shareholder is obliged to compensate the company for the difference between the value stated in the articles of association and the sale value of the contribution. The articles of association may provide for further rights of the company in such a situation.
For example, a physical product in an unfinished state may represent a physical defect of a contribution in kind. On the other hand, the fact that the object of the contribution in kind is an item that is owned (wholly or partly) by a third party, or a situation where the contribution in kind is a right that does not exist, may constitute a legal defect.
The liability to compensate for the difference arises upon the occurrence of the defect and the resulting difference between the value of the contribution in kind as stated in the articles of association and its sale value. This is irrespective of whether or not the company has suffered any loss as a result.
Valuation of contributions in kind
The Commercial Companies Code does not impose any obligation to value contributions in kind made to a limited liability company.
The statutory requirement to value contributions in kind applies only to joint stock companies.
If the value of a contribution made to a limited liability company is overstated, the contributing shareholder and those members of the Management Board who were aware of this and nevertheless applied for the registration of the company or notified an increase in its share capital to the National Court Register, will be jointly and severally liable to the company (Article 175 § 1 of the Commercial Companies Code).
It is also possible that the obligation to compensate the limited liability company for the value of the contribution arises both from a physical or legal defect in the object of the contribution in kind and from an overvaluation of the contribution.
As in the case of a shareholder’s liability for defects in a contribution in kind made by them, liability for making an overvalued contribution in kind arises irrespective of whether the company has suffered any loss as a result. In such a case, the shareholder of the limited liability company and the Management Board members aware of this are jointly and severally liable to compensate the company for the difference.
This is why it is so important to carefully check the physical and legal condition of contributions in kind to capital companies before making such contributions, and to state their value as calculated on the basis of a current and correct valuation.
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