As established in article 317 of the Capital Companies’ Act (Ley de Sociedades de Capital – “LSC”), a reduction of capital may take place for the following purposes:
1) The restoration of the balance between the company’s capital and net worth which has been reduced as a result of losses;
2) The constitution of or increase in the legal reserves or voluntary reserves; or
3) The refund of the value of the share contributions;
4) And in the case of joint-stock companies, furthermore, the waiver of the obligation to make pending contributions. This does not apply in the case of limited liability companies, given that in accordance with article 78 of the LSC, participations (shares) must be fully paid in upon the granting of the public deed of incorporation (or execution of a share capital increase, as the case may be), while the LSC only requires the payment of 25% of the nominal value of joint-stock company shares at the time of incorporation (articles 79 and following of the LSC).
In turn, the reduction of capital may be carried out via:
a) the decrease of the nominal value of the participations or shares;
b) their amortization; or
c) their pooling.
All of the above have three common denominators:
(i) that the reduction in share capital is agreed by the general meeting with the requirements for the modification of the company bylaws (article 318 LSC);
(ii) the protection of the creditors, who have the right to oppose the reduction, except when the capital reduction:
– is for the purpose of restoring the balance between capital and net worth which has been reduced as a result of losses;
– is for the purpose of the incorporation or increase in the legal reserve (not the voluntary reserves); or
– it is funded by profits or unrestricted reserves or through the redemption of shares acquired by the company free of charge.
(iii) The requirements and demands established for this purpose are met (articles 318 and following of the LSC and article 170 of the Commercial Registry Regulation).
A recent resolution of the General Directorate of Registries and Notaries (Dirección General de Registros y Notariado – “DGRN”) dated 22nd May 2018 affirmed that a “company may not reduce the registered share capital figure in detriment to third parties without respecting the requirements set forth in the Law for the share capital reduction” (articles 331 to 337 of the LSC).
In this case, a limited liability company acquired as own shares the participations that had to be redeemed in order to reduce the capital, pursuant to the reduction agreement previously adopted by the general meeting (instead of first acquiring own shares and only afterwards agreeing to the reduction by way of their redemption).
The unit acquisition price of the participations was much lower than their nominal value, which usually means that the company is experiencing losses.
The company director certified that, upon the date of the share capital reduction, the company was not liable for any debt, therefore, it was not necessary to make any provision for reserves (articles 141 and 332).
However, the Registrar of the Commercial Registry refused the requested registration upon the consideration that the date of effect of the protection of possible creditors is, by definition, subsequent to the date of the agreement of the reduction, thus it was appropriate to either constitute a voluntary reserve or to set up a compulsory reserve, or to reduce the amount by losses.
The DGRN confirmed the refusal qualification of the registrar.
In particular, the DGRN affirmed that the joint and several liability system is applicable to the beneficiary partners of the effective reduction (article 331 of the LSC), regardless of whether the restoration of the value is prior or subsequent to the agreement on the reduction.
Likewise, it argued that given that the joint and several liability of each partner is limited to the amount received as restitution of the contribution, when the return of contributions occurs at a value below the nominal value of the participations the amount of which includes the reduction in share capital, the difference must be instrumentalised, either (i) by offsetting losses, (ii) via the constitution of or increase in voluntary reserves or (iii) by the constitution or increase of the amortised capital reserve, thus avoiding the erosion of the creditor protection system.
Carla Villavicencio
Vilá Abogados
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22nd June 2018
