Negative Net Assets, - LLC to be liquidated?!.

An LLC has negative net assets: can a company conduct its business activity provided that according to the results of the second financial year its net assets remain negative?

Clause 3 Article 47-1 of the Code of the Republic of Belarus dated 07.12.1998 N 218-3 (as amended on 09.01.2017) the "Civil Code of the Republic of Belarus" (the Code) prescribes: «3. If on completion of the second and every subsequent financial year the net assets value of a business company is less than its authorized capital, such a company shall in accordance with the established procedure reduce its authorized capital to the amount not exceeding its net assets. If on completion of the second and every subsequent financial year the net assets value of a business company becomes less than the minimum amount of the authorized capital prescribed by the law, a company is subject to liquidation in accordance with the applicable procedure.». Note that Article 28 of the Law of the Republic of Belarus from 9 December 1992 № 2020-XІІ «On business entities» has the similar provision on the authorized capital reduction, however it does not provides for any liquidation.

In the first sentence of the above mentioned clause of the Code a business company is mandatorily required to reduce its authorized capital under the certain condition, and the second sentence represents operative part, when and how such a company is to be liquidated in case of its net assets reduction:

 А) if the minimum amount of a company’s authorized capital is determined by the law and its net assets value is less than the minimum amount;

 Б) a company is subject to liquidation in accordance with the established procedure.

А) A business company by itself determines the amount of its authorized capital, except for the companies which minimum amount of the authorized capital is determined by the law (clauses 7-8 of the Regulations on state registration of business entities approved by the Decree N 1 from 16 January 2009). Taking into account clause 2 of the said Regulations the law also determines the minimum amount of the authorized capital for banks, non-bank credit and financial institutions, insurance companies, insurance brokers, associations of insurers, and state associations.

Thus, the minimum amount of the authorized capital is determined by the law for the following business companies:

a. amount equivalent to 100 base values, - for closed joint-stock companies (CJSC) (paragraph two, part one, clause 8 of the Regulations on state registration of business entities);

b. amount equivalent to 400 base values, - for opened joint-stock companies (OJSC) (paragrapg three, part one, clause 8 of the Regulations on state registration of business entities);

c. 25.000,00 Belarusian rubles (BYN) - for commercial microfinance organizations (clause 3 of the Resolution of the Board of the National Bank of the Republic of Belarus from 14.11.2014 N 692 "On determination of the forms of applications and certificates of inclusion in the Register of microfinance organizations, the minimum amount of the authorized capital of  commercial microfinance organizations and approval of the Instruction on procedure for creation and maintenance of the Register of microfinance organizations");

d. 45.000.000,00 Belarusian rubles (BYN), - for a recreated (reorganized) bank (Resolution of the Board of the National Bank of the Republic of Belarus from 23 June 2015 No 380 "On the minimum amount of the authorized capital of a bank");

e. 500.000,00 Belarusian rubles (BYN), - for a non-bank credit and financial institution during its creation, and as a result of its reorganization as well (clause 1 of the Resolution of the Board of the National Bank of the Republic of Belarus from 20.03.2013 N 163 "On the minimum amount of the authorized capital of a non-bank credit and financial institution and introduction of amendments into the Instruction on safe operation normative standards for banks and non-bank credit and financial institutions");

f. amount equivalent to 5.000.000,00 Euro, - for an insurer (part one, clause 15 of the Regulations on insurance activities approved by the Presidential Decree of the Republic of Belarus from 25.08.2006 N 530 "On insurance activities " (hereinafter - the Regulations on insurance activities));

g. amount equivalent to 25.000,00 Euro, - for an insurance broker (part one, clause 15 of the Regulations on insurance activities).

We should keep in mind (for reference) that in relation to licence applicants and holders of a licence to carry out professional and stock exchange activities it is the net assets value that serves as a criterion of financial sufficiency thereof. Sub-clause 1.1 clause 1 of the Resolution of the Ministry of Finance of the Republic of Belarus from 5 April 2016 No 20 "On determination of financial requirements as to the professional securities market participants and qualification requirements to their managers and employees" provides for the minimum amounts of the owned capital (net assets) of such organizations depending on the type of activities.

Thus, a business entity created in the form of a limited liability company (LLC) that does not carry out special types of activities as a microfinancial organization, bank, non-bank credit and financial institution, insurer or insurance broker, is a company for which the law DOES NOT determines the minimum amount of the authorized capital.

 Б) According to clause 3 of the Regulations on liquidation (cessation of activity) of business entities approved by the Decree N 1 from 16 January 2009 a legal entity can be liquidated only:

3.1. by decision of the property owner (founders, members) or the body authorized by the Articles of Association;

3.2. by decision of the economic court;

3.3. by decision of the registering authority.

In our opinion clause 3 of the above mentioned Regulations contains the specific list of cases for liquidation and  in view of this: paragraph five, part one, sub-clause 3.2 of clause 3 of the Regulations on liquidation indicates that in case «net assets value of open joint stock companies, closed joint stock companies, or other commercial organizations (which minimum amount of the authorized capital, taking into account clause 2 of the Regulations on state registration of business entities approved by the Decree, is determined by the relevant law) on completion of the second and every subsequent financial year becomes less than the minimum amount of the authorized capital determined by the law», such legal entity can be liquidated by decision of the economic court.

To make it more specific, only the following company types can be liquidated by decision of the economic court:

· open joint stock companies,

· closed joint stock companies,

·  other commercial organizations, which minimum amount of the authorized capital is determined by the relevant law, taking into account clause 2 of the Regulations on state registration of business entities.

Therefore, having analyzed the procedure for liquidation of legal entities prescribed by the law, it may be concluded that neither the economic court nor registering authority has a right to take decision on liquidation of a legal entity in the form of a LLC, which net assets value is less than the minimum amount of the authorized capital on completion of the second and every subsequent financial year. In our opinion, such a decision can only be taken by the founders (members) or LLC’s body authorized by the Articles of Association.

CONCLUSION: in our opinion, taking into account that:

  •  the laws does not determine any minimum amount of the authorized capital for a legal entity in the form of a LLC;
  •  if a LLC does not carry out any special types of activity as a microfinancial organization, bank, non-bank credit and financial institution, insurer or insurance broker, which minimum amount of the authorized capital is determined by the law;
  •  the prescribed procedure for liquidation of legal entities contains the exhaustive list of legal entities which can be liquidated by decision of the court, if their net assets value becomes less than the minimum amount of the authorized capital on completion of the second and every subsequent financial year,

a LLC CANNOT be liquidated by the court or registering authority because of decrease in the value of its net assets on completion of the second and every subsequent financial year.

Our conclusion is also proved by the legal precedents and analytics from the leading corporate law theorists of the Republic of Belarus:

· We have found no cases in the court practice of liquidation particular of LLCs which net assets value became less than the minimum amount of the authorized capital;

· Opinion of S.L. KOROTAEV, Dr.sc.oec, Professor at the Belarusian State University of Economics, expressed on 01.04.2016 in the copyrighted material of LLC "UrSpektr" (see: KonsultantPlus), who concludes that in case a LLC has negative net assets its authorized capital needs to be decreased, but he doesn’t say anything about the necessity to liquidate such a company;

· Comment by Y.I. FUNK, Dr.sc.oec, "On a range of differences between a limited liability company and closed joint stock company" as of 02.03.2015 (see: KonsultantPlus), who concludes: «in relation to a closed joint stock company (if the minimum amount of its authorized capital is determined by the law), when on completion of the second and every subsequent financial year its net assets value becomes less than the minimum amount determined by the law, such a company is subject to liquidation (clause 3 Article 47-1 of the Civil Code of the Republic of Belarus). There is no such requirement to a limited liability company …»;

· Opinion of А.М.RYBCHINSKAYA, chief specialist at the Department of Corporate Affairs and Bankruptcy of the Principal Legal Department of the Higher Economic Court of the Republic of Belarus, expressed on 09.12.2013 in the copyrighted material of LLC "UrSpektr" (see: KonsultantPlus), who concludes that the economic court has no right to liquidate a LLC, if its net assets value is less than the authorized capital.

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