In our previous article we listed those financial situations, to which the companies are obliged to react within few months after approving the annual report. However, it is not always clear how to comply with the requirements. We present the solutions of capitalization recommended by us, from which the companies can find the most ideal for themselves.
Capital injection by members
The most comprehensible and obvious solution for an undercapitalized situation is the capital raise. Based on the provisions of the Civil Code, the parties may regulate its method within a wide range, including the following:
- they may determine which elements (amount) of the company’s equity they wish to increase or turn into positive direction. For example, it is possible to put amounts into the capital reserve or accumulated profit reserve simultaneously to the raise of the registered capital;
- they may prescribe whether they wish to participate in the process by monetary or in-kind contribution (e.g., by asset contribution);
- in case of several members, it is possible to state the extent of participation of each member in the capital increase;
- they may resolve whether to execute final capital injection or they wish to leave just the amount required to cover losses in the company in the long run.
For examples, if a member of a two-member company is more well-capitalized, the members may agree to participate in the capital increase not in proportion of their business shares, however in the future they still share the dividend and decide the strategic questions affecting the company as previously. The well-capitalized member may participate in the capital injection in a way that he contributes his financial receivable against one of his customers to the company, and as a result the receivable shall be reported in the books of the affected company.
Financial support from third party
Even a company in an undercapitalized situation may decide to handle its situation with the help of external sources. For example, if an order that is highly profitable in the long run, it is reasonable to obtain for credit or loan from a member to purchase certain assets or finance the wages of the employees.
However, in such cases it is important to act extremely carefully to avoid the company’s insolvency in medium-long term because of the new commitment.
Rearrangement of certain elements of the company’s equity
The companies – based on the examination of the balance sheet – may decide on not involving external sources but resolve the poor equity situation by the rearrangement of certain elements of the company’s equity. It is an option if the company’s registered capital is high, as then it is possible to rearrange losses at the expense of the registered capital. In such cases the members of the company decide on capital reduction. Generally, the registered capital may be reduced to the minimum amount required for the given company form. For example, if a limited liability company is loss-making, but its registered capital is 100 million Hungarian Forints, then 97 million Hungarian Forints may be assigned to compensate the negative capital reserve, accumulated profit reserve within the process of the capital reduction.
In view of the numbers and the company’s business situation it is possible to find the adequate solution for the rearrangement of the capital situation with a relatively great confidence. It is therefore worth to deal with these questions in the period following the acceptance of the reports.