Very often in-kind (non-monetary) contributions are used when establishing a new company or when increasing the registered capital of an existing company – usually rights in rem over immovable property being subject to such contributions. The Commerce Act requires that the Articles of Association, the By-Laws respectively, contain the name of the contributor, full description of the in-kind contribution (its type and all distinctive features), its monetary value and the grounds for the contributor’s rights; for most companies the in-kind contribution needs to be entered into the Commercial Register as well – in their file by using the specially designated for such purposes Field No. 33 “In-kind contribution” (type/description and value of the contribution).
Equally often companies later on dispose of the properties and assets acquired through the contribution – for example, through a sale. That in turn raises very important and interesting issues regarding the already registered entry of the in-kind contribution in the Commercial Register and the company statutes. Usually companies want to delete the description of the contribution but what is the practice of the Registry Agency on such issue?
According to my observations in most cases the Registry Agency issues refusals with respect to applications requesting deletion of a registered in the Commercial Register non-monetary contribution.
The reasons are usually limited to the fact that the deletion of the registered in-kind contribution is a circumstance not provided for by the law as being subject to entry – the registration of an in-kind contribution only shows that the company’s capital included a non-monetary contribution at a certain point in the past. It is held that the executed alienation transactions with property rights, having been subject to a non-monetary contribution, constitute changes in the patrimony of the company but do not have relevance as to the already paid-up company’s capital and are not subject to entry into the Commercial Register.
The situation is no different in cases where deletion is requested together with and as part of a capital decrease procedure. The latter has no direct relation to the already made in-kind contributions. That is due to the fact that in general the alienation of a contributed into the company’s capital property does not lead to necessity of undertaking steps for decrease of the capital – for example, following the sale of a property the selling company will receive the sale-purchase price to compensate for the value of the sold asset.
Even when the decrease of the capital is needed, such direct relation will also be absent, because the capital is a numeric value and when it is decreased an obligation for the company may arise, but such obligation will not be for returning the property, but for the payment of a certain amount. In connection to the latter it is important to be noted that there aren’t any procedures provided for by the law that may be defined as “return of a non-monetary contribution”, “reverse in-kind contribution”, etc.
The judicial practice predominantly recognizes the refusals of the registration officials with the Registry Agency and their reasoning therein as right and lawful1. There are judgments in the opposite sense but they are relatively rare and at that point they should rather be considered as an expression of an isolated practice.
In numerous court judgments it is deemed permissible to delete an in-kind contribution but such judgments have been rendered in different situations and under different circumstances; they may be generally divided into two groups.
In the first group of judgments it is recognized that the deletion of a non-monetary contribution may be permissible where absence of a valid assignment of rights has been established – due to the transaction being null and void, vitiated or impossible to rely on against the actual owner of the property subject to the in-kind contribution.
The second group of judgments refers to situations where the deletion of the entry is allowed as a result of a successful legal action pursuant to Art. 29 of the Commercial Register Act – aimed at the establishment of nullity or inadmissibility of the entry or the non-existence of an entered circumstance.
I am inclined to agree to most of the arguments set out above denying the feasibility of deleting the in-kind contributions from the Commercial Register. The reason for this is that the entry into the Commercial Register is of great importance – the contribution of a real estate into the company’s property constitutes a complex set of elements where the transfer of the ownership right occurs upon the entry of the contribution into the Commercial Register (constitutive effect).
However, it can’t be totally denied that companies willing and trying to delete the description of the non-monetary contributions following the subsequent sale of the respective assets is well justified in terms of their interests. The reason for this is that the lack of deletion of the in-kind contribution creates misleading appearance as to the company owning property that in fact has already been transferred over to another person.
Such false appearance is reinforced by the fact that the registration of the company (in the case of constitutive contribution), respectively the registration of the capital increase (in the case of subsequent contribution), creates a presumption for the validity of the contribution – because when considering the received applications the registration officials are supposed to check whether or not the special requirements allowing the requested entry have been complied with.
In view of the above, in my opinion it would be desirable to find an option that takes into account the interests of the companies. Such solution may be relatively easy to find on a legal-technical level – through changing the structure of the electronic file and making use of the fact that information therein is organized in fields, which in turn are combined into groups, which are further combined into sections.
Accordingly, the reduction of the risk of creating misleading appearance could be sought by separating Field No. 33 “In-kind contribution” into another section or else, which will not be displayed in the “General Status” of the company close to the data regarding the amount of the registered capital. As an alternative or an additional option a special new field could be introduced showing the history of the changes in the ownership of the real estate property subject to the contribution (as, in principle, it could also be done within the company’s Articles of Association or By-Laws).
1 E.g., Decision № 308/25.03.2014 on commercial case № 392/2014, Varna District Court