Reduction of capital to provide voluntary reserves: applicable regime

Reduction of capital to provide voluntary reserves: applicable regime

Throughout the life of company, there may be situations where the share capital, as we have seen in previous articles, for a limited liability company is at least 3,000, and for a joint-stock company 60,000 may be modified by the entry of new investors who provide financing through capital increases or, as in the present case, situations of capital imbalance or separation of shareholders form the company, which require a reduction in capital.

The last assumption will be the subject of our article today.

Thus, the capital reduction is an operation that, as its name indicates, consists of reducing the company’s capital stock, either through the reduction of the par value of shares or interest, or through its amortization or grouping. Well, the Capital Companies Law Act in article 317.1 defines the methods of reducing capital, that is, “The capital reduction may be aimed to restore the balance between capital and net worth of the company that has decreased as a result of losses, the creation or increase of legal reserve or voluntary reserves or the return of the value of contributions. In public limited companies, the reduction of capital may also be aimed at lifting the obligation to make overdue contributions’’.

In this sense, the reduction in capital may result from the following modalities:

• Capital reduction to compensate for losses.
• Capital reduction to establish or endow the legal reserve.
• Capital reduction to establish or provide voluntary reserves.
• Capital reduction to return contributions to partners.
• Forgiveness of overdue payments, in case of public limited companies.

How does capital reduction work to constitute or provide voluntary reserves?

This type of reduction method modifies two interests for accounting purposes.

On the one hand, the equity interest will be decreased in the proportion as second interest, and the available reserve increases. For the purposes of this type of capital reduction, the consent of the General Meeting of Shareholders is required, specifically the same majority as is necessary to amend the Company’s Regulations.

On the other hand, the Capital Companies Act, article 328 states that  “the provisions of articles 233 to 326 shall apply to the reduction of the share capital or the increase of the reserve requirement”, therefore: it imposes a second requirement, that is, the need to present the balance sheet after audit. This is stated in the Regulations of the Commercial Register “a verified and approved balance, indicating the name of auditor and the date of verification. The balance, together with the auditor’s report, will be incorporated into the deed, the name of the auditor and the dates of verification and approval of the balance shall be recorded in the registration”.

Available or unavailable character of the reservation

At this point, we are struck by the question of whether these voluntary reserves can be created under the available or unavailable category.

In this sense, we draw your attention to the Resolution of the General Directorate of Registries and Notaries of November 16,2015, which states that the constitution of voluntary capital reduction should be established under unavailable category, or otherwise, with measure that would grant due protection to the company’s creditors, measure that we listed below:

• Recognition of the right of opposition of creditors in the Company’s Regulations.
• Provision of liability of the partners in the Company’s Regulations in the event of a capital reduction to establish or endow available voluntary reserves.

Letslaw

Letslaw offers you commercial advice from experts in capital reduction, who will guide you through the various capital reduction modalities to choose those which will comply with your company needs.