Contributions from partners to own funds and participatory loans.
Meriem El Maaloumi Louchefoune
Abogada at TOMARIAL, SLP
It is very common for a newly formed limited company to produce negative results in its first year (and, in many cases, in the second one too) and that it can be easily placed in a situation of economic imbalance. In this article we start from this situation: in a company there are losses as a result of negative results from previous years, which reflects in the balance sheet own funds with an amount less than half of the share capital figure.
Equity is made up of the share capital, reserves, the results of the previous years not applied and the results of the year. Well, the Capital Companies Law (hereinafter, LSC) in its art. 363.1.e), expressly contemplates the equity imbalance as a mandatory cause of dissolution in the following terms: The capital company must be dissolved: (…) e) For losses that reduce the net worth to an amount less than half of the share capital, unless it is increased or reduced to a sufficient extent, and provided it is not appropriate to request the declaration of insolvency.
In addition, this may imply for the administrators of the company an important patrimonial responsibility, foreseen in art. 367 LSC, which implies that the administrators respond jointly and severally to the legal cause of dissolution of the administrators in case of breach of their obligation to convene the general meeting within two months to adopt, where appropriate, the dissolution agreement, as well as administrators who do not request judicial dissolution.
With the purpose of compensating these losses without resorting to external financing, providing the company with more liquidity, cleaning up the annual accounts so that they have a good image for third parties who come to their consultation, more and more the use of the contributions from partners to own funds (without capital increase) and participatory loans, issues that we will discuss next.
Contributions from partners to own funds
On the one hand, the contributions of the partner to the own funds are made exclusively by the partners as opposed to the increase in share capital, which can be made by third parties outside the company. Monetary, non-monetary and credit compensation contributions from the contributing partners can be made.
As for the formalities and the procedure, as we anticipated, it is a greatly relaxed operation. It is simply adopted by agreement of the general meeting and is recorded in the book of minutes of the company. It is advised that the agreement be adopted unanimously by the partners and that the contributions be made in a correlative manner to the shares of each partner in the share capital, which makes this mechanism more viable in societies with a small number of partners. This procedure is not mandatory, but it is recommended. Finally, it is not necessary to raise it to the public, nor its registration in the Commercial Registry, thus avoiding notarial and registration expenses.
With regard to their accounting, these types of contributions are not integrated in the share capital and, consequently, the percentages of participation in the share capital of the contributing partners are not altered, that is, the contributing partners do not see their contribution increased participation proportionally to the contribution they make. It is considered one more available reservation. However, the reality is that the shares / participations of the contributing partners increase their net book value and increase their acquisition cost. An accounting entry must be made within Group 1 in account 118 “contributions from partners or owners”, since these are assets provided by the partners or owners of the company when they act as such, by virtue of operations not described in other accounts. That is, provided that they do not constitute consideration for the delivery of goods or the provision of services performed by the company, nor have the nature of a liability. In particular, it includes the amounts delivered by the partners or owners for compensation of losses.
As a last characteristic closely linked to its accounting, we highlight the issue of the reimbursement of contributions to members and, since, lacking specific commercial regulation, it seems that in principle the contributions are definitive and not refundable to members, they cannot bear the accrual of interest. It is a kind of contributions to "lost fund", which are made "without receiving anything in return." However, its return may be feasible through the dividend distribution route.
Participatory loans
On the other hand, participatory loans, regulated in art. 20 of Royal Decree Law 7/1996, of June 7, on urgent fiscal measures and the promotion and liberalization of economic activity, are an instrument that, like the contribution of partners to own funds, allows to correct situations of equity imbalance without resorting to the increase in share capital, or the credit of financial institutions.
The funds obtained with the participatory loan will be considered own funds (unlike those obtained with a conventional loan) and the main difference with respect to the contributions of members, it is observed that the participatory loans do generate a right of reimbursement in favor of the lenders, according to the conditions that are agreed. In addition, they can be carried out by anyone, that is, not only by the partners and are implemented in a private contract, subject to elevation to the public, with the prior agreement of the parties.
Finally, it highlights the obligation to agree on an interest when dealing with a related operation. The interest can be fixed (regardless of the evolution of the business) or variable (depending on the evolution of the activity of the borrowing company). The criteria to determine such evolution may be: net profit, turnover, total equity or any other freely agreed by the contracting parties.
In conclusion, as we see, the contributions of partners to own funds (without capital increase) and participatory loans are efficient alternatives to typical commercial operations of capital increase or reduction and are placed as preferred to them because they avoid formal rigidity ( we refer to the legal procedure, the elevation to the public and the registration in the Mercantile Registry) and the time and money costs of the capital increase / reduction.
