Romanian SRL – Loss of Capital

Romanian SRL

The current economic climate in Romania is such that at the end of 2020 many Romanian companies may find that their capital has been substantially reduced because of falling income and reduced activity in Romania because of COVID-19.

Probably the first time that the shareholders will become aware of this position will be when the administrator prepares and approves the financial statements for the year end, and it is submitted to them. The Companies Law provides in this circumstance that the administrator must when they become aware of the situation convene a meeting of the shareholders to review the position. The law provides that if a company loses more than fifty per cent of its capital then according to art. 154 para 4 of the Companies Act the registered capital of the company has to be reduced or the shareholders must increase the capital of the company or do both.

As the accounts of the company will normally be drawn at the end of the financial year (31st December in most cases) only at this time will the real capital position of the company become apparent. Many companies will argue that only at this point of time will the financial position become clear as over the year there will have been different financial positions from time to time.

The law states that the administrator has to convene the meeting as soon as he is aware of the position but this can only be when he can call the Annual General Meeting to review the financial position of the company. It should be noted that the law does not provide a specific term for him to call the meeting or for the capital of the company to be adjusted. It is necessary for the capital position to be corrected by the end of the next financial year and recorded in the books of the company, therefore the company has time to review the position and take the necessary steps to make the company compliant with the law.

From the administrators position as long as the company does not suffer any damages following the late convening of the annual general meeting the administrator will not have any liability for convening the meeting at a later date than the period prescribed by law. However, it should be noted that the company’s shareholders can meet in an extraordinary meetings without the meeting being convened with the normal notice period provided they all agree and the minutes of the meeting state that they have expressly waived the convening procedure.

The decision which modifies the Company’s Articles of Incorporation must be approved by all the company’s shareholders. It must state the amount that the capital is reduced too, either by decreasing the nominal value of the shares or by reducing the number of the shares provided the legal minimum is observed.

The decision must be published in the Official Gazette of Romania for a period of two months before submitting the other corporate documents for the capital reduction to become effective. The two months is a term during which the creditors of the company can file an opposition. These creditors are also entitled to obtain guarantees for their debts that have not become due by the date of publication of the decision.

After the share capital is reduced according to the provisions of art. 154 para 4 of the Companies, consideration can be given to increasing the company’s capital if that is required.

The increase of capital can be done by either increasing the capital by payment of new money into the company or a shareholder or creditor can turn their debt into shares, thus increasing the share capital of the company. This operation is carried out according to the provisions of art. 210 para. 2 of the Companies Law.

The most efficient way to increase the capital by this method is to convene a General Assembly of the Shareholders under the provisions of art. 154 of the Companies Law to discuss the reduction of the capital of the company and its possible increase and the method to be employed. The Companies law provides that the share capital of a limited liability company can be increased using a debt of a creditor with newly issued shares.

The increase of the share capital by debts compensation is made by adopting a Shareholders decision voted in unanimity and registering it with the Trade Registry together with the document proving the debt and updated financial statement / balance. The creditors do not have the right to file an opposition against this operation. The condition for a credit to be able to be compensated with newly issued shares is that such claim is due.

Even if it is a document requested by the Trade Registry in particular cases, an accountancy technical report certifying the exact value of the receivable and the fact that it is certain, liquid, and due is advisable.

Once these transactions have been finalised then the capital base of the company will be restored, and the company will not be in breach of the law regarding capital.

Although at the present time the final accounts of companies are not prepared and will not be done so until after 31st December 2020 our advice is for administrators together with their accounts department to look at the likely position at the end of 2020.

Should they or the shareholders feel there has been a serious eroding of the company’s capital base during 2020 and therefore that the company’s capital will have been reduced below the amounts required by law, then they should be considering what steps should be taken in 2021 to ensure that the company’s capital is restored.

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