Loss of half of equity

Verified 27 July 2023 - Legal and Administrative Information Directorate (Prime Minister)

The loss of half of the share capital reflects a alarming financial situation for business (SARL/EURL, SA, SAS/SASU). The occurrence of this situation leads either to the dissolving the business, or the obligation for members to replenish equity.

The share capital corresponds to contributions made during creation business by shareholders or members.

The equity corresponding to all the business' resources, they shall reflect its financial value. These are the funds contributed by members or shareholders to the creation of the business (the share capital) to which are added the funds generated by its activity.

Equity is calculated by adding up the following:

  • Share capital
  • Reserves
  • Carry-overs
  • Issuance premiums
  • Investment grants
  • Profit or loss for the financial year
  • Regulated provisions

The expression " loss of half of the share capital ’ refers to the situation in which a business finds, taking into account its losses, that its equity becomes less than half of the share capital.

Example :

A SARL at the share capital of €5,000 records a loss of €9,000 during its accounting year.

Moreover, its reserves amount to €3,000, the postponement again to €2,000 and regulated provisions at €1,000.

Thus, the amount of equity is (5 000 + 3 000 + 2 000 + 1 000) - 9 000 = €2,000.

The amount of its equity (€2,000) is therefore less than half of the share capital (€2,500).

However, this situation is regulated and must be regularized by business.

If, as a result of the losses recorded in the accounting documents, the equity becomes less than half of the share capital, the business must comply with a specific procedure.

This procedure includes the following steps:

  1. Consultation of partners
  2. Collective decision of the members: for or against the dissolution of the business
  3. Publishing to a legal listing support
  4. Registration at the company formalities office
  5. Reconstitution of equity: if dissolution has been rejected by the shareholders.

FYI  

This regulation is not not applicable to the businesses in the procedure for backup or judicial redress. The same applies to businesses in a collective name (CNS) and single sponsorship businesses (SCS) which are not subject to any obligation if their capital is lost.

1. Consultation of partners

In case of loss of half of the capital, the head of the business must organize a consultation of partners (or shareholders). This consultation shall cover the appropriateness of dissolve or not dissolve the business. We are talking about a early dissolution.

The consultation shall give rise to a vote to intervene in a four-month period from the approval of the accounts showing such loss.

2. Collective decision of the members

The partners, meeting in an extraordinary general meeting, must vote for or against dissolution business. It is therefore the rejection of dissolution which gives rise to the continuation of social activity (the most frequent case).

Majority conditions vary according to the legal form business (SARL/EURL, SA or SAS/SASU).

SARL/EURL

Dissolution of the business shall be voted in accordance with the majority conditions laid down for amendments to the Staff Regulations :

  • SARL incorporated before 4 August 2005 : the decision must be adopted by the members representing at least 3/4 of the shares. There's no pitch of quorum required. A minimum number of participants present or represented at the AGE is not required.
  • SARL incorporated after 4 August 2005 : the general meeting may validly deliberate only if the partners present or represented possess at least 1/4 shares (on first notice) and 1/5 of these (on second notice). If not, a new meeting must be convened within 2 months. If the quorum is respected, the amendments must then be decided by a majority of 2/3 of the shares held by the members present or represented.

The decision shall be recorded in minutes.

FYI  

In theEURL, all the powers normally vested in the shareholders’ meeting in the SARLs belong to thesole partner pronounced in the form of unilateral decisions. There are no rules to be applied with regard to calling, voting or quorum. On the other hand, each decision must be recorded on a special register held at the registered office. This register must be marked and initialed by the judge of the commercial court, by the judge of the judicial court, or by the mayor or deputy mayor of the commune of the registered office.

SA

Dissolution of the business should be voted on at the qualified majority of 2/3 the votes of shareholders present or represented.

The decision shall be recorded in minutes.

SAS/SASU

Dissolution of the business shall be voted on within majority conditions laid down in the articles of association.

The decision shall be recorded in minutes.

FYI  

In the SASU, all the powers normally vested in the shareholders’ meeting in the SAS shall belong to thesole partner pronounced in the form of unilateral decisions. There are no rules to be applied with regard to calling, voting or quorum. On the other hand, each decision must be recorded on a special register held at the registered office. It is recommended that this register be marked and initialed by the judge of the commercial court, by the judge of the judicial court, or by the mayor or deputy mayor of the commune of the registered office.

If the members have not deliberated within the four-month period, all interested (e.g. a competitor) may request the forced dissolution from business to commercial court. The court may grant the business an additional period of six months to consult the members.

3. Publish legal announcements in a media

The decision taken (dissolution or maintenance of the activity) must be published in legal ad media, for to inform third parties the evolution of business.

The amending notice shall contain following mentions :

  • Mention of the decision taken: dissolution or continuation of the activity
  • Name of company of the business
  • Shape of the business
  • Address of registered office of the business
  • Unique business identification number (Siren number)
  • Amount of the share capital of the business
  • The words ‘RCS’ followed by the name of the city of the registry where the business is registered.

The legal advertisement must be published in a 1-month period from the date of the decision. Once published, a certificate of publication the notice of amendment is issued to the business.

4. Registration at the company formalities desk

The decision taken must also be recorded on the website of the company formalities office.

Company Formalities Window

The subsequent documents shall be transmitted:

  • Copy of the minutes which decided to dissolve or to maintain activity
  • Copy of the updated articles of association: dated and certified as original by the legal representative
  • Certificate of publication of the notice in a legal listing support

Please note

He's no need to renew such disclosure formalities in each subsequent financial year if the equity is still less than half of the share capital.

5. Equity replenishment

If the dissolving is discarded, the business has a two-year period to regularize his situation by reconstituting its own capital. Specifically, this period runs from the establishment of the losses by the annual ordinary general meeting (AGOA) approving the accounts for the preceding financial year.

The business shall rebuild the equity to the extent of value of at least half of the share capital.

Reconstitution may take multiple shapes :

  • Making sufficient profits to absorb losses
  • Increase in share capital : the business asks the partners to inject new funds (in cash or in kind) or welcomes new investors. These investors will have to be fully informed of the reasons for the transaction in the light of the future prospects of the business.
  • Waiver of claims : in order to improve the situation, the members decide to abandon the reimbursement of the sums which they have made available to the business in the form ofcash advances on current account.

Example :

A SARL at the share capital of €5,000 records a loss of €7,000 during its accounting year.

Its accumulated reserves amount to €3,000.

The amount of equity is therefore: (5 000 + 3 000) - 7 000 = €1,000.

The amount of its equity (€1,000) is therefore less than half of the share capital (€2,500).

The business shall carry out an increase in the share capital, the amount of which shall now be €9,000. So the equity goes to €5,000.

Therefore, the amount of equity (€5,000) is again more than half of the share capital (€4,500).

The business that has not restocked up to half of its share capital within the two-year period shall have new deadline of 2 years for to reduce its share capital.

This reduction must go up to a minimum threshold fixed at 1% of the balance sheet total for the last financial year. Where a minimum share capital is required by the social form (e.g. €37,000 minimum capital for SA), the threshold corresponds to the highest amount: either the minimum share capital or 1% of the balance sheet total for the last financial year.

Warning  

In the absence of a capital reduction at the end of that further two-year period, the dissolution of the business may be given at the request of any interested party.

To regularize its situation, the business can carry out a loss-driven capital reduction followed by capital increase, this is called a " accordion shot ”. This complex practice consists initially in erase losses by reducing the nominal value of securities. Second, new investors provide funds to increase equity capital to more than half of the share capital.

Where equity has not been replenished, the business shall have two years after the capital increase to reduce its share capital to the minimum threshold of 1% the balance sheet total for the last financial year (or €37,000 for SA).

Where the business has regularized its situation, it may request that the reference to the loss of half of the share capital be removed from SCR: titleContent. To do so, it must to record the adjustment at the general meeting and file the minutes at the registry of the commercial court. It is not necessary that this amending entry be preceded by an advertisement in a legal advertisement medium.

In the event of a loss of half of the share capital, failure to comply with the regularization procedure may give rise to several sanctions :

  • Dissolution of the business
  • Questioning the civil liability of managers
  • Injunction under periodic penalty payment

Dissolution of the business

If the business does not respect the deadlines set for consulting the partners (4 months) or regularizing the situation (2 years + 2 additional years), it shall incur the risk of dissolving. We are talking here about forced dissolution or judicial dissolution.

Please note

The court may grant the business a maximum period of 6 months to carry out the necessary procedures.

The dissolution may be requested from the Commercial Court by any interested party (e.g. a competitor, partner). The quality of creditor business is not sufficient to characterize that interest required by law.

However, the court may not order dissolution if, on the day on which it rules on the substance, the regularization has taken place.

Challenge of civil liability of the leader

The civil liability of the director may be called into question if his inaction prevented the regularization of the situation (e.g. the manager did not consult the partners). Thereafter, if the business is the subject of a judicial liquidation, he may be convicted of mismanagement to settle all or part of the liabilities of the business. This is called " to cover social liabilities ”.

The sums paid by the condemned leader will be distributed among all the creditors in proportion to their claims.

This penalty is added to the dissolution of the business.

Injunction under periodic penalty payment

The judge appointed to supervise the SCR: titleContent can order to be subject to periodic penalty payments the business to proceed with the publication formalities if it is out of time. In other words, the business will have to pay a sum of money every day, week or month of delay.

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