A part of a company's equity, other capital funds, can
be defined as funds created from the contributions provided by
shareholders. They are created usually when there is a need to
swiftly increase the company´s equity.
Despite the fact that other capital funds have been used
frequently, their creation but more importantly, distribution
has been a contested issue, with differing opinions among
As of January 1 2018, new rules are in place regarding
creation as well as use of other capital funds in limited
liability companies and joint stock companies. Regarding the
creation of other capital funds, three conditions must be met.
First of all, the company´s bylaws must allow their
creation, then the contribution (money or in kind) must be
approved by the general meeting of shareholders, and the
contribution must be fully paid up by the shareholders.
Once these conditions are fulfilled and the other capital
funds are created, there comes the more important issue, which
is their use. Other capital funds may either be used for
increasing the basic share capital of the company or for
distribution among the shareholders. Under the new legislation,
the conditions for the distribution of capital funds among the
shareholders are stricter than those related to their use for
increasing the basic share capital of the company.
In both these cases, two basic conditions must be met. As in
case of the creation of the funds, the distribution of other
capital funds among the shareholders or their use for
increasing the basic share capital must be allowed by the
company´s by-aws and approved by the general meeting of
the company's shareholders. It is arguable whether other
capital funds may also be distributed to shareholders who did
not contribute to their creation.
Moreover, in the case of the distribution of the other
capital funds among shareholders, an announcement of the
distribution and the amount of money that will be distributed
must be published at least 60 days before the distribution
takes place. The law does not specify where this information
should be published; however, in our opinion, publication in
the Commercial Gazette would be sufficient.
The new legislation also stipulates restrictions related to
the distribution of other capital funds among the shareholders.
In this regard, other capital funds cannot be distributed among
shareholders, if the company (i) is in crisis or (ii) the
distribution itself would cause the company to be in crisis.
Crisis means that the company is in default or threatened by
default (the value of equity compared to liabilities is below
eight to 100). A company is deemed in default in two
situations. The first situation is where a company has more
than one creditor and the value of its liabilities exceeds the
value of its assets whereby liabilities towards related parties
are not taken into account (over-indebtedness). The second
situation is where a company is more than 30 days late with
payments of more than two monetary obligations towards more
than one creditor.
Furthermore, other capital funds cannot be distributed in
cases where the company´s equity is, or after the
distribution would be, less than (i) the share capital, (ii)
the unpaid share capital, (iii) the legal reserve fund, and,
(iv) other funds which, according to law or the by-laws, cannot
be paid out to the shareholders.
In cases where all the above-mentioned rules related to
distribution of the other capital funds have not been adhered
to and the shareholders have accepted the distribution while
acting contrary to good faith, in principle, they are obliged
to return the money. Shareholders can only avoid returning the
money if they can prove that they accepted it in good
The obligation of the shareholders to return money cannot be
waived by the company. Moreover, the executives of the company
guarantee the return of the distributed capital funds to the
company. This guarantee applies to the executives who were
performing their corporate function when the capital funds were
distributed. However, it also applies to executives who began
performing their function after the capital distribution
occurred but did not enforce the return of the funds if it can
be shown that, given the circumstances, they knew or could have
been aware of the obligation to enforce the return of the
distributed capital funds. Basically, this means that if the
company is not able to recover the unlawfully distributed
capital funds from the shareholders themselves, the money may
be recovered from the responsible executives.
Please note that the new rules do not apply to other capital
funds which were created before January 1 2018; for those other
capital funds, the old rules will continue to apply.