Capital losses: more flexible adjustment procedure

It is not uncommon for companies to encounter financial difficulties in the early years of their existence. When capital is affected by losses, a procedure provided for in the French Commercial Code sometimes has to be put in place. This capital loss adjustment procedure has recently been made more flexible for companies whose shareholders' equity has fallen below half their share capital.

What is the regularization procedure?

The regularization procedure applies to SARLs, EURLs, SAs, SASs and SCAs whose shareholders' equity has fallen below half their share capital.

Equity represents the company's resources and reflects its financial value. It is calculated by taking into account share capital, reserves, retained earnings, share premiums, investment subsidies, net income for the year and regulated profits. Share capital corresponds to the contributions made by shareholders or associates when the company is created.

What are the formalities?

If, as a result of losses incurred through potential cash mismanagement, shareholders' equity falls below half the share capital, the company concerned must follow a specific adjustment procedure.

The first step is to consult the shareholders on whether or not to dissolve the company. This consultation gives rise to a vote which must take place within 4 months of approval of the accounts showing the loss.

The second stage involves a collective decision by the partners. If dissolution is rejected, the company continues to operate. If no decision is taken within 4 months, any interested party may apply to the Commercial Court to have the company forcibly dissolved. The company is generally given 6 months to consult its associates.

The decision taken following consultation of the associates must be published in a legal announcement medium to inform third parties. This must be done within one month of the decision being taken. The decision is also registered on the company's formalities website.

The final stage is the reconstitution of shareholders' equity. Once the company has decided not to dissolve, it has 2 years to regularize its situation by reconstituting shareholders' equity to a value at least equal to half the share capital.

This reconstitution can take the form of :

  • profits,
  • a capital increase,
  • or a debt waiver.

A more flexible regularization procedure

Article 14 of the law of March 9, 2023 provides for a more flexible procedure for regularizing the situation. Until now, in the event of continued activity, the company had to regularize its situation no later than the close of the second financial year following that in which the loss occurred.

Henceforth, any company failing to restore its shareholders' equity to half of its share capital within 2 years will be able to renew this period to reduce its share capital to a minimum threshold to be set by decree. Only at the end of this period will any interested party be able to request the forced dissolution of the company.