One of the fundamental safeguards for the operation of a limited liability company is the maintenance of an adequate capital position. In Hungary, the incorporation of a limited liability company requires registered capital of at least HUF 3 million; (around 8.500 EUR) however, during the company’s operation, it may occur that, due to loss-making business activities, the company’s equity falls below this amount.
A decrease in equity does not in itself mean the end of the company’s operation, but it is a warning sign to which both the owners and the management must respond. The primary purpose of the statutory rules in such cases is to protect creditors, business partners and the security of commercial transactions.
What measures must be taken in such a situation, and what happens if the company fails to act?
The members may choose from several possible solutions:
- ordering supplementary payments, provided that this is permitted by the articles of association
- increasing the registered capital
- transformation or merger of the company
- as a last resort, termination of the company without legal succession
The purpose of the statutory rule is to ensure that the company’s members respond to capital loss in due time and make sure that the company has an adequate asset base to meet its obligations. For this reason, regularly monitoring the development of equity and taking prompt action where necessary is one of the key duties of the management.
It is also particularly important that the management identifies the problem in time, as delayed or omitted measures may, in certain situations, also raise liability issues.
It should also be emphasized that the managing director or managing directors of the limited liability company must act without delay if a change occurs in the company’s financial position that may affect the company’s continued operation. This is the case in particular if:
- the company’s equity has decreased to half of the registered capital as a result of losses
- the company’s equity has fallen below the statutory minimum amount of the registered capital
- the company is threatened by insolvency, or
- the company’s assets do not cover its debts.
In such cases, it is the task of the members’ meeting to decide what measures can restore the company’s operation. The possible solutions expressly referred to by law include the options mentioned above, such as ordering supplementary payments or providing capital.
It is important to note that any provision of the articles of association that sets less stringent requirements for the company than those mentioned above is null and void.
Can the registered capital be reduced below HUF 3 million?
The short answer is: yes, but not without limitation.
The Hungarian Civil Code allows the registered capital to be reduced below HUF 3 million, but only on a temporary basis.
“The company may resolve to reduce its registered capital below the minimum amount specified by law if, simultaneously with the reduction of the registered capital, a capital increase resolved at the same time is carried out, and as a result the registered capital reaches at least the minimum amount of registered capital specified by law.”
At first reading, this provision may be difficult to interpret, but its practical benefit is considerable: it may be used not only for loss settlement, but also in the context of a change in ownership structure.
Let us consider a completely ordinary, practical example:
In our example, the registered capital of the limited liability company is HUF 6 million. A new investor would contribute HUF 2 million to the company and would like to acquire a 50% ownership interest in return. If the registered capital remains HUF 6 million and the investor increases the capital by HUF 2 million, the registered capital will become HUF 8 million:
- existing owner: HUF 6 million = 75%
- new investor: HUF 2 million = 25%
This is not 50–50%. This shows that reducing the registered capital below the minimum does not serve exclusively loss settlement:
The member first reduces the registered capital to HUF 2 million, and then the investor increases the capital by HUF 2 million:
- existing owner: HUF 2 million = 50%
- new investor: HUF 2 million = 50%
Thus, with the same HUF 2 million investment, the investor may acquire a 50% ownership interest instead of 25%. In this case, the reduction of the registered capital is a tool for rearranging ownership proportions, rather than a withdrawal of assets from the company.
If you have any questions regarding your company’s capital position, registered capital reduction or capital restructuring, it is advisable to seek legal advice in due time in order to choose the appropriate solution. Our firm is at your disposal; please do not hesitate to contact us.
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