Capital increase by credit compensation

Capital increase by offsetting credits What does it consist of?

In situations of lack of liquidity, the Company may have been financed through credits from the partners themselves. The company finds itself with high liabilities and low share capital, which leads to an imbalance in the Company. To reduce this disproportion, the subscribed share capital is increased by offsetting the receivables. In this way, the capital will resemble the company’s reality.

Since the creditors were already shareholders, new shares or participations will be created or the value of existing shares or participations will be increased. Thus, their share in the capital stock will be increased.

However, it may happen that it is not the shareholders themselves who have lent financing to the Company. With the compensation, these creditors will become shareholders as consideration for the cancellation of their claims. They will receive shares in the Company. But not always the credits will be compensated in their totality. It may happen that only a part of the claim is paid in shares or stock. Partial offsetting is allowed.

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Requirements

The Capital Companies Law establishes the conditions for the Capital to be increased by offsetting credits. There is a difference depending on whether the Company is a Corporation or a limited liability Company.

• In the case of a corporation, at least 25% of the credits to be offset must be liquid, due and payable. The maturity of the remaining receivables may not exceed five years.
• In the case of a limited liability Company, 100% of the receivables to be offset must be fully liquid and due and payable.

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Contributions from shareholders that do not represent a capital increase

the contributions of the partners are not regulated in our Legal System. They are assets delivered by the partners acting as such, by virtue of operations not described in other accounts.

How does this operation materialize? The steps to follow.

The report of the Administrative Body

The administrators will draw up a report stating that the data of the credits agree with the Company’s accounts. The report may be examined by the shareholders at the registered office. This right to information must be stated in the notice of the call of the General Meeting.

This report must contain:

• The nature and characteristics of the credits to be offset.
• The identity of the contributors.
• The number of shares to be created or issued.
• The amount of the increase.

It is essential that the credits to compensate are perfectly identified. For this purpose, the singularities of each credit must be specified.

In the case of corporations, in addition to the aforementioned report, the auditor must issue a certificate. Certifying that the data presented by the administrative body is accurate. If the Company does not have an auditor, the administrators may request his appointment by the Commercial Registry. This certification must also be made available to the shareholders at the registered office at the time of the meeting.

The resolution of the General Shareholders’ Meeting

In order to increase capital stock by offsetting credits, the consent of the rest of the shareholders is required. For this purpose, as we have been saying, a General Meeting must be called. The resolution must be approved by the majorities provided for in the LSC.

Registration in the Mercantile Registry

Logically, this capital increase must be recorded in a public deed. It must contain the following information:

• The name of the creditor.
• The date on which the credit was contracted.
• The statement that it is fully liquid and due.
• The statement that the administrators’ report has been made available to the shareholders with the call.
• The administrators’ report itself.

In order to be able to register this increase of capital in the Registry it will be necessary to fulfill the requirements exposed previously. Otherwise, the corresponding inscription will not be made.

If this article has been of interest, we also suggest you to read the following article published on our website: How is your capital gain taxed?