If the net assets of your company have shrunk, you may receive a ruling from the Commercial Register: put the capital in order, or the company may be dissolved compulsorily. This is serious, but in most cases it can be fixed — often without putting new money into the company.
What the law requires
The Commercial Code ties the requirement to the share capital. If the net assets fall below one-half of the share capital, the shareholders must adopt a decision. The Commercial Code, § 176, says:
"If the net assets of a company are less than one-half of the share capital, the shareholders must decide on:
1) a reduction or an increase of the share capital, on the condition that the net assets would thereby amount to at least one-half of the share capital, or
1¹) the taking of other measures as a result of which the net assets of the company would amount to at least one-half of the share capital;
2) the dissolution, merger, division or transformation of the company, or
3) the filing of a bankruptcy petition."
Source: Commercial Code § 176.
Note: the net assets do not have to be negative for the requirement to be broken. The threshold is one-half of the share capital, not zero. Positive equity does not automatically mean that everything is in order.
What happens if no decision is made
If the shareholders adopt none of the decisions under § 176, the court may dissolve the company compulsorily. An important nuance: the court does not dissolve the company because of the shortfall in net assets itself, but because none of the required decisions has been made (§ 203).
Before dissolution, the court gives a term for putting the situation right. The Commercial Code, § 203 subsection 3, says:
"If a deficiency or other circumstance which is the basis for compulsory dissolution can evidently be eliminated, the court shall first set the company a term for eliminating the deficiency or circumstance."
In other words, you have a chance to put things right beforehand. The worst choice is to ignore the ruling.
How to fix the situation
In most cases the net assets can be brought back to at least one-half of the share capital. Often without paying in new money. The three most common routes:
- Turning a shareholder loan into capital. If a shareholder has lent money to the company earlier, that loan can be converted into share capital (an increase of the share capital). The liability disappears and the net assets grow by the same amount. The money was already in the company — only its legal form changes. This is the most common solution.
- Reducing the share capital. A smaller share capital means a lower threshold that the net assets have to reach. A company no longer has a minimum share capital set by law, which makes this route flexible today. It requires the creditor protection rules to be followed.
- Other measures (§ 176 clause 1¹). The net assets can also be raised by a non-monetary contribution or by a shareholder waiving a claim. Their tax effect has to be checked first.
Which route suits your company, and in which order, depends on the actual state of the balance sheet.
This article was prepared with the help of artificial intelligence.