There are at least several ways in which a limited liability company can be recapitalised. The increase in the company’s share capital seems to be a standard and well-known form of recapitalisation, but there are also alternatives including additional payments and a shareholder loan.
Additional payments – an effective way to recapitalise the company
This can be an effective way to recapitalise a limited liability company. However, this is only possible where the shareholders have allowed for additional payments to be made by a separate provision in the Articles of Association. If the Articles of Association contain no provisions permitting the making of additional payments, then, in accordance with the Commercial Companies Code, no monetary contribution made by a shareholder to the company will qualify as an additional payment.
Additional payments to the capital of a limited liability company
Additional payments are allocated to the company’s legal reserve (and not to the share capital, as in the case of shareholders’ contributions increasing the share capital).
The funds may be used by the company to make planned investments, finance current operations, increase creditworthiness or cover losses.
The principle of proportionality and the reimbursement of additional payments
A company may not levy additional payments in an arbitrary manner, as, in accordance with the principle of proportionality, such payments should be imposed on and made by all shareholders equally, in proportion to their shareholding. Additional contributions may be reimbursed to the shareholders to the extent that they are not necessary to cover the loss shown in the company’s financial statements.
By a loan agreement, the lender (in this case, a shareholder) agrees to transfer to the borrower (in this case, the company) a certain amount of money or things specified as to their kind only, and the borrower agrees to repay the same amount of money or return the same number/quantity of things of the same kind and quality. The agreement should contain provisions specifying the amount of the loan, the amount of interest and the terms and date of repayment.
Considerations when granting loans by shareholders who are also Management Board members
The conclusion of a loan agreement by a shareholder who is also a member of the Management Board of a limited liability company will require:
- Consent of the Shareholders’ Meeting in the form of a resolution
- A shareholders resolution consenting to the assumption of an obligation to provide a performance with a value of twice the amount of share capital, unless the Articles of Association exclude the application of Article 230 of the Commercial Companies Code
- The appointment, via a Shareholders’ Meeting resolution, of an attorney for the company, or the representation of the company in the loan agreement by the Supervisory Board
- In the case of a sole shareholder who is also a member of the Management Board – the loan agreement to be in the form of a notarial deed
Key differences between additional payments and loan agreements
- Apart from money, the subject of the loan agreement may also be things specified as to their kind (i.e. things specified by their generic characteristics, without individualising features)
- Additional payments are made on the basis of a relevant provision in the Articles of Association and a resolution of the Shareholders’ Meeting
- The loan agreement may be concluded in any form, unless the loan is granted by the sole shareholder who is also a Management Board member, in which case a notarial deed will be required for the agreement to be valid
- Additional payments are made by all shareholders, subject to the principle of proportionality
- A loan may be granted by either by one shareholder or several or all of them
- The loan should be repayable and bear interest at market rates
- The making of additional payments implies an obligation on the part of the shareholders to make a monetary contribution to the company, which may be refundable
When deciding to recapitalise a limited liability company, it is essential to be aware of the potential implications of the various forms of recapitalisation.
For company shareholders participating in both the company’s profits and losses, knowledge of these mechanisms is therefore crucial.
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