New Concept of Dissolution Threshold: Net Equity below Half of the Share Capital
Following the adoption of Law 2023-171 of March 9, 2023, new regulations have been established to safeguard companies whose net equity becomes inferior to half of their share capital, protecting them from potential dissolution.
Previously, when commercial companies found themselves in this situation, they were obliged to hold an extraordinary general meeting within four months of the annual ordinary general meeting that had observed this situation. The objective was to decide the possible dissolution of the company or to pursue the business (major case). If the extraordinary general meeting voted against the dissolution, the company then had two financial years to restore net equity to over half of the share capital. However, if restoring capital was not achieved within the specified timeframe, any interested party could seek the dissolution of the company. For the record, the court may grant an additional period of 6 months to regularize the situation and the dissolution is rejected if the regularization took place on the day when it rules on the affair.
However, to align French legislation with the softer European standards, Law 2023-171 of March 9, 2023, introduced more flexible regulations. Now, the risk of dissolution applies only to companies that have not brought their capital to a minimum threshold after a period of two financial years.
According to the decree of July 25, 2023 (Decree 2023-657), this minimum threshold now varies depending on the type of company:
- for SARL and SAS, the limit is now set at 1% of the total balance sheet of the company at the last financial year-end
- for an SA, whose minimum share capital is €37,000, the limit corresponds to either 1% of the company’s total balance sheet observed at the last financial year-end or €37,000, whichever is greater
In addition, in case of recapitalization of the company without Equity exceeding half of the share capital, the new rules will apply. Thus, the share capital must be reduced to the thresholds indicated above by capital reduction before the end of the second financial year following that during which the capital was increased.
Companies must be aware of these new rules and in particular with regard to the financial charges deductibility limitation mechanism (thin capitalization). By doing so, they may avoid the risk of dissolution and ensure the stability and continuity of their businesses.
We hope this article has provided clarification on the recent developments regarding the dissolution thresholds for companies with insufficient equity capital.
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Daniel Wickers
Partner
Selim Boutaleb
Manager
