Are shareholder loans to the company part of the equity? In the year 2020, the Supreme Court has resolved the controversy.

Introduction

Strict liability excludes interpretations. Otherwise, it would not be objective. What is net worth for the purpose of liability for debts? Does it exclude or include shareholder loans? STS 215/2020 of 1 June 2020 settles this controversy. With an informative vocation we expose what the Supreme Court understands by Net Worth in the year 2020.

Are member loans to the company part of the net worth? The Supreme Court in the year 2020 resolves the controversy.

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What is objective liability?

It is characterized by the obligation to repair the damage caused even if there is no fault or negligence. This is the main feature that distinguishes it from subjective liability. The actor is liable for the risks derived from his actions even if no unlawful acts have been carried out. In objective liability, as in subjective liability, it is necessary to prove the causal relationship between the act and the damage produced. However, there is a reversal of the burden of proof, and the action generating compensable damage is presumed to be negligent.

What is debt liability and how is it regulated?

Debt liability arises when a company in the process of dissolution continues to operate in the commercial trade. These legal grounds for dissolution are regulated in article 363 LSC. The administrators of the company will be jointly liable for the debts incurred after the occurrence of this cause. Provided that they have not called a General Meeting within two months to adopt the resolution of dissolution. Also when they have not applied for bankruptcy or judicial dissolution, if applicable, within two months from the date of the meeting.

Directors’ liability for the Company’s debts

What types of shareholder loans are there?

Shareholder loans are social contributions that enhance the company. However, depending on their regulation, they can either be part of the liabilities or  the equity.

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When can the distribution of the company’s funds be considered a damage?

Logically, any distribution of funds that goes against social interests is harmful to society.

What are  the shareholders loans?

They are a type of loan characterized by the fact that are part of the company’s net worth and not of the liabilities. They are granted by the partners to finance the company. The repayment of the principal and a necessarily variable interest linked to the performance of the company is agreed. Therefore, the partners participate in the evolution of the business. Notwithstanding the above, a fixed interest can also be agreed.

They are regulated in Article 20 of Royal Decree Law 7/1996, of June 7, on urgent measures of a fiscal nature and the promotion and liberalization of economic activity. Their characteristics are as follows:

• The criterion to determine the evolution of the business can be whatever the parties freely agreed to.
• In case of early repayment, the parties may agree on a penalty clause. Early repayment can only be made when it is compensated by an increase of the same amount of equity and does not come from the revaluation of assets. In this case it will be necessary to increase capital by compensating credits.
• They are loans qualified as subordinated, placed after the ordinary creditors.
• As we mentioned before, they are considered Net Worth for the purposes of capital reduction and liquidation of companies.

Are all partner contributions subject of a capital increase?

No. The contributions of the partners do not always have to constitute a capital increase. They are assets granted by the partners due to their status as such, by virtue of operations not described in other accounts. The equity increases without modifying the participation in the capital of the partners. Therefore, the contributions must be made in proportion to their percentage of capital stock. However, they will not be considered as equity when they are granted under the condition of being repayable. These contributions are part of the Net Worth and generally their purpose is to compensate losses and restore the balance of the patrimony.

What is Net Worth for purposes of liability for debt according to the Supreme Court?

To state what we should understand by Net Worth, the Court in Ruling 215/2020 of June 1, 2020 is based on the wording of Article 363.1 e) LSC. A company will be in cause of dissolution when its Net Worth is less than half of the share capital. It is defined as the surplus of the company’s assets, after deducting all its liabilities. It is the part that corresponds to the partners once the assets have been written off and the liabilities settled.

Therefore, the participative loans and the contributions of the partners are part of the Net Worth. And this is because we are talking about the company’s own financing and not about a credit claim. The partners have made these contributions to provide liquidity to the company, not entailing their return. If they are not participative loans, the loans of partners are considered liabilities and are outside the Equity.

Participatory loans and partner contributions can help a company to avoid the legal cause of dissolution. As we commented, this is because they increase the amount of the Net Equity, being the liabilities excluded from it.

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