Our article provides for the restoration of the company’s financial stability through additional payments. We present the advantages and disadvantages of the legal entity in order to ensure that your company can operate properly.
When a company is founded, the initial (i.e., subscribed) capital is equal to the equity capital, but this may change during the operation of the company. If the company’s financial situation becomes uncertain, the managing director is responsible for immediately calling a general meeting or initiating a decision-making process without holding a meeting in order to compensate for losses. Our Civil Code clearly regulates what must be done if the company’s equity capital decreases to half of the share capital due to losses or the company falls below the minimum amount specified in the law. In this situation, the members are obliged to do everything that may be suitable to handle this situation.
What options do members have?
In the situation outlined above, one of the most expedient solutions is to require additional payments, but the members may decide to reduce the share capital or provide equity capital reaching the share capital level in other ways. However, if these are not possible, measures must be taken within 3 months regarding the transformation, merger, division or termination of the company without a legal successor.
What are the limitations on ordering additional payments?
Previously, it was only possible to order additional payments for limited liability companies. However, the 2022 innovation of the Civil Code is that additional payments can be ordered for any business company, with the exception of publicly traded joint-stock companies.
The additional payment serves to cover the loss. So, of course, it can only be made in such unfavorable situations. In addition, one of the most important rules is that, in the case of a multi-member company, the company’s articles of association must expressly provide that the supreme body must impose an obligation for the members to make additional payments to cover losses. Of course, there is no obstacle to subsequent amendment of the articles of association if the justification for the additional payment arises.
In the case of a single-member limited liability company and a single-member joint-stock company, the above is not necessary; in these cases, it is sufficient for the founder or sole member to establish the conditions for the additional payment in their resolution.
What should you know about additional payments?
If the articles of association allow for the ordering of additional payments, the schedule and deadline for their payment must be determined in a resolution of the general meeting of members. The obligation to make additional payments is generally borne by the members in proportion to their financial contribution but, of course, it is also possible for the partnership agreement to provide otherwise. However, the guarantee rule of the Civil Code must be taken into account, according to which a provision that completely excludes a member from the profit or loss is null and void.
In addition to making a payment to the company’s cash account or cashier’s office, the additional payment can also be made through a non-monetary service. It is even possible for the member to provide a claim as an additional payment, if it has been acknowledged by the debtor or is based on a final court decision.
Is the additional payment refundable?
The additional payment is not only refundable, but the part that is not necessary to cover the loss must be refunded indeed. Although the membership structure may change between the additional payment and its repayment, the repayment must always be made to those members who are in a membership relationship with the company at the time of repayment. However, repayment can only take place after the full payment of the financial contributions.
What are the benefits of making an additional payment?
Additional payments are popular primarily because they represent a significant administrative relief compared to, for example, a reduction in share capital. In the latter case, the change must be recorded in the company agreement and reported to the court of registration.
It is also important that the amount of the additional payment does not increase the member’s financial contribution, as this is only a temporary measure to restore the financial situation. It does not mean an increase in the amount of the subscribed capital, which is significant because, in the event of a possible later capital loss, half of the subscribed capital must be taken as a basis again. In addition, unlike the benefit provided under the title of a member loan, here the business organization that received financial assistance does not have to count on the interest payment obligation.
Overall, additional payments can be an effective tool for restoring the company’s financial stability, but attention must be paid to legal requirements.
