Recently, the Ministry of Justice of the Slovak Republic (the “Ministry”) published a draft of amendment to the Slovak Commercial Code (the “Draft Amendment”) for public consultation. The Draft Amendment contains numerous substantial changes which we will discuss in series of separate blog posts. This post will look at the provisions relating to capital funds of companies.
Although the current legal regulation in the Slovak Commercial Code contains several provisions referring to “other own resources” of companies, it does not contain any specific rules on their creation and use. As a result of this absence, there are many questions and practical issues related to creation and use of these funds which have persisted for many years but have not yet initiated any substantial changes. However, introduction of definition of company in crisis made these questions even more important. Aim of the newly proposed provisions is to clarify the regulation and eliminate these shortcomings. These provisions shall apply to both limited liability and joint stock companies existing under the Slovak law.
What Can Form “Capital Funds”?
According to the Draft Amendment, and in line with the specific regulations, the following can be recorded as “capital funds” of companies:
- Share premium;
- contributions paid by shareholders for acquiring advantage in connection with distribution of profit;
- contributions of shareholders that are not related to advantage for shares and are aimed at strengthening of equity;
- Sum representing increase of equity of the successor company, other then registered capital and reserve fund.
When and How Can These Funds Be Created?
According to proposed wording, capital funds under b) and c) above can be basically created at any time, if the decision of shareholders, Articles of Association, Founder’s Deed or Statutes of the company so provide.
It should be noted that specific rules apply to capital funds under point c) above. Only assets that are capable of being contributed to registered capital are eligible. Thus, any funds (monetary contribution) or assets that may be expressed in monetary terms (in-kind contributions, e.g. receivables from the company used for debt-for-equity swaps) can be contributed. However, it is prohibited to make investment contributions in the form of commitments to perform work or supply services. Specific restrictions apply to various types of contributions. For monetary contributions, payments in cash are prohibited and for in-kind contributions, their value has to be determined by an expert opinion.
How Can These Funds Be Used?
The Draft Amendment contains specific rules related to repayment of capital funds. With regard to capital funds under points a), b) and d) above, within a period of two years, these funds can only be used to cover the loss of a company, unless a specific act stipulates otherwise. Capital funds under point c) can be distributed to shareholders, subject to specific rules. These funds can only be distributed 60 days after the publication of a notice regarding the distribution and only if the company is not in crisis or would not be in crisis as a result of such distribution. The company may not distribute such funds to shareholders if, taking into account all the circumstances, it would cause its own insolvency. Naturally, any distribution of funds would be subject to certain specific rules related to equity of the company.
As mentioned above, the Draft Amendment is only at the early stage of legislative procedure; any proposed changes may be further amended. For instance, comments related to elimination of restriction of distribution of such funds were raised in legislative procedure or even proposals to completely abandon such regulation. Even if not yet final, these proposals give us some indication as to how capital funds will be treated.
We will discuss other substantial changes proposed by the Draft Amendment in our future posts so stay tuned!