STATUTORY CAPITAL LTD. WHAT TO KNOW?
To date, in terms of the practical existence of limited liability companies, a number of issues remain unresolved, the most pressing of which are:
1) What is the authorized capital of a limited liability company. Whether it is obligatory to form, support it and which state body controls the actual existence of the authorized capital;
2) How the authorized capital affects the activity of the company;
3) Impact of the authorized capital and share of the participant on leaving the company, obtaining the relevant part of the property and profit.
Let’s try to understand the above issues.
When establishing a Limited Liability Company, the founders of the general meeting make decisions on the formation of the authorized capital, the period of its formation (half a year or one year, unless otherwise provided by the charter), the size of the shares in the authorized capital of each of the founders (if there are several). Contributions to the authorized capital may be made by the founders of money into the account of the LLC, in the amount equal to their contribution, or by any property that is assessed in accordance with the legislation and in the amount equal to the size of the contribution.
According to Art. 144 of the Civil Code of Ukraine (hereinafter – the Central Committee of Ukraine), the authorized capital of a limited liability company consists of deposits of participants of such a company and guarantees the interests of its creditors.
To date, the law does not provide for the minimum share capital of limited liability companies. Thus, the authorized capital may amount to 1-2 hryvnia, although it will certainly affect the assessment of the existence and activity of society in the eyes of its counterparties. In fact, the law obliges the founders solely to contribute the authorized capital, but does not impose liability for non-introduction. This provision can be useful only if there is a corporate conflict between the participants in the LLC and the dishonest actions of a certain participant are to make no contribution, in which case the court will support the exclusion of the dishonest participant from the founders of the LLC.
In the order of Part 3 of Art. 144 of the Civil Code of Ukraine, in case of non-payment of the authorized capital in whole or in part, the meeting of the founders of the limited liability company makes one of the following decisions:
– expel a person who has not made a contribution from the founders and redistribute the shares;
– reduce share capital and redistribute shares;
– to liquidate the partnership.
According to Part 4 of Art. 144 of the Civil Code of Ukraine, if after the end of the second or each subsequent financial year the value of the net assets of the limited liability company turns out to be less than the authorized capital, the company is obliged to announce the reduction of its authorized capital and to register the corresponding changes to the charter in the established order, if the participants have not accepted decision to make additional contributions.
At the same time the rules of the Central Committee of Ukraine are spelled out in such a way that in fact the meeting of the founders of the company is obliged to make one of these decisions, however, in practice, it is impossible to oblige the meeting of the founders to make any decision. There is no appropriate mechanism for this purpose, there is no control body and, as a whole, it is inadmissible according to certain norms of the Central Committee of Ukraine. In addition, in order to understand the value of the net assets of the company, it is necessary to carry out an appropriate inventory and audit financial analysis, the obligation of which is clearly not regulated by Ukrainian law.
It is important to note that the process of formation of authorized capital is not controlled by state bodies, many societies operate in conditions where a certain amount of authorized capital is prescribed in the charter, but it has never been formed. The current legislation of Ukraine does not provide for liability for refusal of the real formation of the authorized capital. In addition, it is not excluded that the next day after the formation of the authorized capital in full by depositing funds into the bank account of the company, such cash in the full amount will be transferred to other accounts (counterparties, clients, etc.), such in this way, society will actually be left without material and financial resources.
Following the abolition of the mandatory minimum requirement, authorized capital is rather an abstract monetary equivalent of values that a society should own, and a convenient way of replenishing the cash pool than a real criterion for evaluating a company’s activities, its financial condition, and the ability to meet creditors’ requirements effectively.
It is necessary to distinguish between property belonging to the company and contributed to the authorized capital by its founders, and property belonging to the company and acquired by it. In the second case, such property is on the balance sheet of the company without contribution to the authorized capital.
Property owned by the company and contributed to the share capital by its founders can be sold by the company at any time without reducing the share capital. Many notary lawyers are amazed at how you can sell a registered capital building without reducing it. It is quite simple, in fact, that authorized capital exists exclusively on paper, without a real and effective link to the current state of affairs in society.
Author: Anatoliy Perepelchenko