Understand All About Loss Driven Capital Reduction!

In the life of a company, social practices follow one another but are not always the same. Thus, after a period of significant financial setbacks, it may be wise or even imperative to proceed with loss-induced share capital reduction. In fact, depending on your situation, it is the law that may require you to resort to this operation to avoid closing your business. What is deficit-induced capital reduction and how to do it: we tell you everything!

Loss-induced share capital reduction: what are we talking about?

Loss-induced share capital reduction is a legal action that occurs when a company’s losses are too high at the end of the financial year. Thus, it is a mandatory step if the equity of the company falls below 50% of the share capital. In fact, restructuring own funds is a legal obligation. Since then, you have 2 years to reduce your capital (Article L223-42 of the Commercial Code).

However, it is also possible to induce a loss in share capital, even if the equity is not less than half of the share capital. In fact, you can use this operation to clean up a delicate condition. The reduction in capital then intervenes to absorb the company’s losses. It is then possible to increase the share capital to resume your activity: this is commonly referred to as the “blow of the accordion”.

Deficit-induced capital reduction is done in 2 possible ways:

  • By reducing the number of shares: the company buys back and cancels a certain number of shares from partners and shareholders;
  • Diminishing the value of shares: Partners hold the same number of shares, but their nominal value is revised downwards.

It should be noted that a reduction in share capital almost always indicates the fragility of the company, so it is an operation that should not be taken lightly. Remember to communicate to minimize the negative effects of such an announcement.

nice to know

Creditors cannot object to the reduction in capital induced by losses.

Stages and formalities of deficit induced capital reduction

For any significant decision affecting the company, it is necessary to respect the steps of loss-induced capital reduction as well as their formality.

Steps Before Loss Driven Share Capital Reduction

In order to reduce the share capital, it is mandatory for the shareholders to convene an Extraordinary General Meeting (AGE) with the decision to reduce the share capital of the company as its agenda. Actually, this operation involves the modification of methods. This step is required in both SAS and SARL (Article L225-204 of the Commercial Code).

At the end of the general meeting, you must write down the minutes of the EGM relating to all voting business. Lastly, it will be necessary to update the Company’s Association of Associations.

If the company has an auditor, the latter should write a report on the reasons and status of the shortfall in capital. This report should be presented to the shareholders during the EGM.

Once these steps are completed, you will still need to publish a capital reduction notice in JAL (Journal of Legal Notices) or SHAL (Authorized Support to Publish Legal Notices).

Good to know: With effect from January 1, 2021, it is no longer necessary to register the Deed of Decision on Reduction of Share Capital with Taxes (SIE).

Then it is time to move on to the formalities of reduction in loss-induced share capital.

capital deduction formalities

To complete your capital reduction project driven by losses, you must file a file with the registry of the commercial court you depend on, or file with the CFE (Centre de Formalités des Entreprises). It brings together:

  • A copy of the updated, dated and certified Articles of Association;
  • A copy of the AGE report, certified true;
  • Two copies of the M2 form dated and signed;
  • A copy of the certificate of publication in JAL;
  • A power if you delegate your formalities to a third party.

The registry then studies your file and sends you the most up-to-date Kbis within a period of about a week to a month.

nice to know

Don’t forget to update all your legal and business documents. In fact, share capital is a mandatory detail that should appear on all your invoices, contracts, quotes or even flyers.

questions to ask

How much does loss-induced share capital reduction cost?

The court cost is €192.01. The amount of a legal declaration varies according to its length and the newspaper chosen. Calculate between 150€ and 300€ on average. So around €500 in total.

Why reduce the share capital of a company?

The reduction in share capital driven by losses makes it possible to clean up a company’s accounts and give it a chance to bounce back after a bad patch.

Can Creditors Prevent Loss Induced Capital Reduction?

No, the creditors are only notified of the in-progress operations, but they cannot, under any circumstances, contest the loss-induced share capital reduction.

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