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 professionals.
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 faith.
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.
|Rudolf Sivák||Lenka Paluchová|