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Net assets are less than charter capital — not a cause for winding-up?


 
Ministry of Economic Development of the Russian Federation proposed to abolish company winding-up basis that provides for the liquidation of joint stock companies (JSC) and limited liability companies (LLC), while the net asset value is lower than the charter capital amount. For that purpose, the Ministry has developed the draft Federal law “On Amending Part One and Two of the Civil Code of the Russian Federation” (the Bill)1. Furthermore, the Bill also excludes the duty to register charter capital reduction in case of company's net assets value decrease.
 
According to the current legislation, if the net assets value is lower than the charter capital amount at the end of the 2nd or each subsequent financial year, a JSC or LLC shall increase the net assets value or decrease the charter capital amount at its discretion. If the net assets value at the end of the 2nd or each subsequent financial year is lower than the minimum amount of the charter capital, company shall be liquidated2.
 
The Bill authors declare 2 main goals: civil law improvement and creation an environment for projects implementation in terms of concession agreements and agreements on public-private partnership (PPP).
 
Alignment with the judicial practice
 
The abolishing of the above-mentioned company winding-up basis makes the Bill in line with recent trends in corporate law. The charter capital is increasingly understood as a provisional value that consists of the shares nominal value and provides certain corporate rights to shareholders rather than is considered to be criteria of legal entities financial viability. There are many other indicators for assessing the economic efficiency of legal entities.
 
There is also an opinion in the judicial practice that the decrease of the net asset value lower than the charter capital minimum amount is not a company winding-up incontestable ground3. Moreover, repeated violation of Art. 90 (4) and Art. 99 (4) of the Civil Code is not a basis for urgent company liquidation. The law violation in conjunction with consequences should be material4.
 
The Bill explanatory note said that formal winding-up company basis as an absence of income does not indicate that company is not able to perform duties on payment of regulatory charges or liabilities to creditors.
 
For creditors’ protection, the other criteria of financial insolvency are used. For example, according to the Federal Law «Оn Insolvency (Bankruptcy)» the insolvency of a debtor is presumed if it is unable to pay5. Insolvency means the inability of a legal entity within 3 months:
 
  • to pay severance money;
  • to pay salaries;
  • to pay taxes, fees, and other regulatory charges.
 
Is the concern for concessions and PPP an argument?
 
According to the explanatory note, one of the main Bill objectives is setting the stage for infrastructure concession and PPP agreements. It is noted that a special purpose vehicle (SPV) is created in project financing. Its net assets during the preparation and justification, design and construction of the investment project may be lower than the charter capital amount for several years. Such a company should not be a subject for liquidation as it fulfills the obligations.
 
However, this argument in Bill support is losing ground in a view of the explicit prohibition of the Federal Law "On the securities market"6. The SPV liquidation is not allowed according to the art. 90(4) and art. 99(4) of the Civil Code. Moreover, such actions are unacceptable even if the charter capital is formed above the established minimum amount.
 
_____
 
2Art. 90(4), 99(4) of the Civil Code of the Russian Federation
3Judgement of the Constitutional Court of the Russian Federation of 18 July 2003 No. 14-П “In the case concerning the review of constitutionality of the provisions of Article 35 of the Federal Law “On Joint Stock Companies”, Articles 61 and 99 of the Civil Code of the Russian Federation, Article 31 of the Tax Code of the Russian Federation and of Article 14 of the Arbitration Procedure Code of the Russian Federation in connection with complaints of A.B.Borisov, Closed Joint Stock Company “Media-Most” and Closed Joint Stock Company “Moscow Independent Broadcasting Corporation”
4Decree of the Supreme Arbitrazh Court No. VAS-6089/09 on case No. A37-609/2008-14 dated 25 May 2009
5Art. 3 of the Federal Law No. 127-FZ dated 26 October 2002 “Оn Insolvency (Bankruptcy)”
6Art. 15.2(9) of the Federal Law No 39-FZ dated 22 April 1996 “On the securities market”


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