Change in share capital in capital companies in bankruptcy and restructuring proceedings

Change in share capital in capital companies in bankruptcy and restructuring proceedings

Share capital is a key structural element of capital companies – it is the original asset on which the activities of the newly established entity are to be based. It also has a guarantee function vis-à-vis creditors. In the case of bankruptcy or restructuring proceedings against a capital company, the possibility of changing its amount is questionable.

Share capital

The share capital is divided into shares (in a limited liability company) or shares (in a joint-stock company), to which the members of the company are obliged to contribute to its coverage. However, the share capital is not a fixed fund – it may change in the course of the company’s operation. Increase or decrease of the share capital can only take place in the manner provided for in the Commercial Companies Code.

The decision to increase or reduce the share capital belongs to the shareholders whose rights resulting from the shares held are subject to restrictions in connection with bankruptcy or restructuring proceedings, which directly translates into the possibility to decide on a change in the share capital.

Increase in the share capital

In the case of a share capital increase, two opposing views can be identified. According to the first one, an increase in share capital cannot take place during the liquidation phase of the company (and also in case of its bankruptcy). According to the second, an increase in the share capital can take place at any stage of the company’s existence. The first position is justified by the contradiction of the institution of the share capital increase with the objectives of liquidation or bankruptcy proceedings, which are aimed at ending the company’s activity. In turn, the argument for the correctness of the second position is the possibility of supporting liquidation. An example can be the financing of investment in the company’s assets in order to sell it more favorably. The aim may also be to increase the funds available to satisfy the company’s creditors. An increase in share capital may also be an argument in favour of accepting an arrangement in bankruptcy.

In the case of restructuring proceedings the above doubts do not exist, the share capital increase is consistent with the objective of these proceedings. In the case of restructuring, it may even more be aimed at convincing the creditors to vote in favour of the arrangement. The increase in share capital can be primarily one of the measures to be taken in the context of the restructuring.

Reduction in share capital

In the course of insolvency proceedings, it should be argued that a reduction in the company’s share capital should not be allowed. This is supported by the need to protect the assets of a bankruptcy against depletion. A reduction in the share capital could theoretically take the form of a transfer of part of the share capital to another item of the company’s capital, but in this case, due to the specific nature of bankruptcy proceedings, it would be impossible to conduct the convoy proceedings that are necessary to reduce the share capital.

The same position should be taken in the case of the cure. The protection of the mass of the cure and the lack of possibility to conduct the convoy proceedings, exclude the possibility to reduce the share capital. Similar arguments are in favour of not allowing a reduction in the share capital in the arrangement procedure and in the accelerated arrangement procedure.

The possibility to reduce the share capital should, however, be allowed in the case of the procedure for approval of the arrangement, which is of an extra-judicial nature and constitutes protection of the company’s assets. The construction of this procedure also does not preclude the conduct of convoy proceedings, as there is no prohibition to pay the debt covered by the arrangement.

It seems that both the bankruptcy proceedings and the restructuring proceedings may in turn allow for a reduction of the share capital and its simultaneous increase. Such an operation does not affect the amount of the company’s assets.

 

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