Changes to distribution and payment of corporations’ profit and other components of equity
Rules for the distribution and payment of profit and other components of equity should change substantially from 2021 through an amendment to the Act on Corporations, which has recently been submitted by the Chamber of Deputies to the Senate. The new rules aim not only to remove existing deficiencies and remedy the imperfect transposition of EU legislation but also respond to latest developments in case law.
One of the most significant changes to the distribution and payment of funds is the implementation of rules for the use of accounting documentation, following a recent judgment of the Supreme Court (ref. no. 27 Cdo 3885/2017). According to the draft amendment, it will be possible to use ordinary or extraordinary financial statements approved by a corporation’s supreme body as a basis for the distribution of funds until the end of the accounting period following the accounting period for which the financial statements were prepared.
Certain rules should also be harmonised to apply to all of a corporation’s funds regardless of their origin. The amended law should explicitly prescribe that the distribution of both profit and other own resources can only be carried out based on ordinary or extraordinary financial statements. The amended law should also specify uniform balance sheet tests, i.e. methods of calculating the maximum amount for distribution and payment, for joint stock companies, limited liability companies and cooperatives. These will also be terminologically aligned with accounting legislation. However, opposed to other components of equity, profit will continue to be subject to a slightly different statutory regime.
The amendment also tightens the rules for refunds of paid profit shares. Members of limited liability companies will no longer be protected from the duty to refund the paid profit shares by their good faith that the statutory conditions for profit share payments have been fulfilled. The good-faith argument will only be preserved with respect to joint stock companies. Shareholders will have to refund their shares of profit and other components of equity only if they knew or must have known that the statutory conditions upon the payment have been violated.
Another innovation is, for example, the explicit specification of cases in which it is necessary to refund the paid advance for a profit share, or the implementation of protective measures against disguised profit payments.
In our opinion, the proposed legislation is not without deficiencies. Questions arise in particular regarding, e.g., the explicit exclusion of the application of the rules for the distribution and payment of profit and other components of equity to decreases in the registered capital. It would certainly not be desirable for a corporation’s bodies aiming to decrease a corporation’s registered capital not having to pay attention to the corporation’s economic performance, thereby bringing financial difficulties or even bankruptcy onto their entity. Similarly controversial is also the new rule according to which the unpaid share of profit or other components of equity of joint stock companies, limited liability companies and cooperatives should be, without exception, transferred to retained profits if an insolvency test is not met. In this manner, resources not deriving from profit would be transformed into profit, resulting in a change to the statutory regime for treating these funds.
Obviously, we may expect relatively extensive changes in the distribution and payment of corporations’ profit and other ‘own resources’, which may significantly affect one of the shareholders’/members’ fundamental rights. The amendment to the Act on Corporations is currently with the upper chamber of parliament.