The amount of the capital may be changed during the existence of a company. The Commerce Act provides for the reduction of the fixed (stock) capital – i.e., reducing the number that represents its value (the registered in the Commercial Register capital).
The reduction of capital is aimed at either the release of property (effective reduction) or bringing the capital into line with the value of the company’s net assets (nominal reduction). There might be various reasons for initiating effective reduction, such as: changes in the financial status (no further need of funds which may be instead subject to distribution among the shareholders), returning an in-kind contribution to a shareholder1, etc. Nominal reduction may be required due to incurred losses which could lead to decapitalization of the company.
The amount of the capital is part of the mandatory minimum content of the statutes of the various types of companies (Articles of Association of a Limited Liability Company, Incorporation Deed of a single-person LLC, By-Laws of a Joint-Stock Company), which is why its reduction entails the necessity of making amendments to the respective statutes. The reduction should also be entered into the Commercial Register.
The capital reduction procedure is set out in Articles 149-153 of the Commerce Act (with regard to limited liability companies) and Articles 199-203 of the Commerce Act (with regard to joint-stock companies). Reduction can be carried into effect by: reducing the value of the shares (stocks); discharging of the obligation to pay up the unpaid portion of the shares (stocks); returning the share in the capital to the shareholder who has terminated his membership in an LLC; invalidation of shares (in the case of a JSCo.).
The procedure includes: resolution of the General Meeting adopted in compliance with the legal requirements; publication of the resolution in the Commercial Register; entry of the reduction into the Commercial Register.
The resolution needs to be adopted unanimously (in the case of an LLC) or by a majority of 2/3 of the represented capital (in the case of a JSCo.); it also needs to specify the purpose of the reduction and the way the latter is to be carried into effect. With the publication in the Commercial Register it is to be considered that the company has declared readiness to provide security for claims or to pay its obligations as of the moment of publication to the creditors objecting to the reduction. Creditors’ consent to the reduction will be presumed if within three months after the publication they do not express in writing their objection.
The resolution for reducing the capital should be requested for entry into the Commercial Register not earlier than the expiration of the time period as per the preceding paragraph and payments to shareholders can be made only after such entry is duly recorded.
Application and Necessary Documents
A special application needs to be filed with the Commercial Register for the purposes of the reduced capital to be registered. There is a standard form for the application – form A4 (in the case of a limited liability company) or form A5 (in the case of a joint-stock company). Prior publication of the General Meeting’s resolution should be requested by means of a form G1 application.
The applications may be filed electronically (via the Internet) as well – by being signed with an electronic signature (filing applications electronically in the case of a joint-stock company is mandatory). The applications should be submitted by the company’s representative (director, executive officer). A lawyer may be authorized for such purposes as well – the power of attorney should be explicit but does not require any notarization of the signature.
Generally, the following documents need to be enclosed to the application:
Minutes with resolutions of the General Meeting (in the case of an LLC notarization of signatures and content pursuant to Art. 137, par. 4 of the Commerce Act might be required2);
Amended or new company statutes (Articles of Association, By-Laws);
Written declaration that either security has been provided or the obligations have been repaid to the creditors objecting to the reduction;
Declaration on the truthfulness of the stated for registration circumstances and acceptance of the submitted for announcement acts;
Document for paid state fee.
In numerous specific situations it will be necessary to present other documents as well, such as a share buyback contract, a certificate for a shareholder (legal entity from a foreign country), invitations and other documents evidencing the proper calling of the General Meeting, etc.
Fees and Other Costs
Pursuant to Art. 16a, par. 3 of the Tariff on the State Fees Collected by the Registry Agency, the state fee for entering a reduction of the capital into the Commercial Register is 30 Levs. Pursuant to par. 4, when the application is filed electronically, including by an authorized to that end lawyer, the due fee would be in the amount of 15 Levs.
The due state fee for publication of the resolution of the General Meeting in the Commercial Register amounts to 40 Levs (or 20 Levs if documents are to be submitted electronically) – pursuant to Art. 16b of the aforementioned Tariff.
Additional costs might apply as well, such as fees for notarization of the Minutes with resolutions (in the case of a limited liability company).
Information about the due attorney fee may be found on page Fees. Please, note that the published information is for reference purposes only – I reserve the right to negotiate a different amount of the fee for each separate case, mostly where the capital reduction procedure entails certain specifics (for example, if aimed at returning an in-kind contribution).
1 You may find additional information on the topic in Blog article Is the deletion of an in-kind contribution from the Commercial Register permissible?
2 The article has been updated on 23.01.2017 in connection with amendments to the Commerce Act which you may find more information about in News article Legal protection against corporate hijacking.