When there are financial difficulties, the company may choose to increase the capital to reduce the debt, thus avoiding the situation of bankruptcy proceedings or settlement of the same.
The crisis situation that many companies have been suffering has led to creditors sometimes not collecting their credits or that the partners themselves had to lend money to the companies. To solve this situation, the company would have to generate enough benefits to pay off those debts.
Compensation of loans with a capital increase
In these situations, a solution for companies is to carry out a capital increase for credit compensation so that creditors will become owners by obtaining shares or shares of the company or if they already have the quality of Partners prior to the extension will increase their participation by the amount of credits that had been previously disbursed to the company. In recent times there has been a lot in the real estate companies.
This form of capital increase involves the transformation of liability payable into capital and, consequently, implies an increase in equity for the company that carries it out.
The capital increase for credit compensation is one of several measures that a Company can use to increase the share capital and should be classified as a subclass of non-monetary contributions. In this case, the capital increase is achieved by transforming the company’s debt by participation in its capital, either by shares in the SA or shares in the SL, which are received by the creditors.
It is important to note that, in the event that the creditors in question do not previously have the quality of partners of the entity that carries out the extension, it is essential to include the elimination of the pre-emptive subscription right of those who already had it before the extension, in addition to the express consent of the creditors themselves who have to become partners.
The elimination of the pre-emptive subscription right must also be considered when the ownership of the credits to be capitalized already corresponds to the partners themselves but, due to disparity in their amounts, with the extension the proportions of their respective shares will be altered. The elimination, where appropriate, of the pre-emptive subscription right, may, on occasion, mean that the capital increase must be carried out with an issuance or assumption premium so as not to harm the previous shareholders.
With this type of capital increase, the debt is reduced and the capital is increased, solving financial tensions in the society and often avoiding bankruptcy proceedings or company liquidations.
What steps should you follow?
This process is regulated in article 301 of the Capital Companies Law (LSC), which addresses both the capital increase itself due to credit compensation and the most ordinary or regular assumption, although provided for large companies, which is the conversion of obligations into shares.
The rule determines different conditions depending on whether the company is limited or anonymous:
- In the case of being a limited liability company (SL), the credits must be fully liquid and enforceable.
- If it is a public limited company (SA), at least 25% of the credits to be compensated must be liquid, past due and enforceable, and the maturity of the remaining credits must not exceed 5 years.
Generally, the increase in credit compensation is made through the issuance of new shares or shareholdings for creditors who have agreed to exchange their credits for shares or participations. In the event that the creditors were already partners, it could be carried out by increasing the nominal value of their shares or shares. In this regard, article 295 of the LSC, which deals with the modalities of the capital increase, establishes that, in general, this may be carried out by creating new shares or issuing new shares or by raising the nominal value of existing ones.
In addition, the following formal obligations are required:
- That, at the time of the convening of the general meeting, a report of the administrative body on the nature and characteristics of the credits to be compensated, the identity of the contributors, the number of participations is made available to the partners at the registered office shares or shares to be created or issued and the amount of the increase, in which the agreement of the data related to the credits with the social accounting will be expressly stated. The corporation must also include a certification from the auditor of the company that proves that, once the social accounting has been verified, the information provided by the administrators on the credits to be compensated is accurate. If the company does not have an account auditor, the certification must be issued by an auditor appointed by the Commercial Registry at the request of the administrators.
- In the announcement of the general meeting, the right of all partners to examine the report of the administrators and, in the case of corporations, the certification of the auditor, as well as Request the delivery or free shipping of such documents.
- The report of the administrators and, in the case of corporations, the auditor’s certification will be incorporated into the public deed in which the execution of the increase is instructed.