Poland: Capital measures
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Managing capital shortfalls (COVID-19 crisis)
3/27/2020
Besides the indisputable health consequences, the occurrence and rapid spread of COVID-19 forces companies and other business actors to face unforeseen economic and financial challenges.
Identifying the capital issues
Some companies are experiencing capital shortfalls, forcing them to implement certain capital measures to protect both the interests of their businesses and their creditors’ interest. If it becomes clear to the management that the company is on the brink of insolvency, immediate actions are needed to avoid loss of financial liquidity or even total bankruptcy.
Possible measures
In such event, it is crucial for the management to inform the founder or, as the case may be, to convene the meeting of the shareholders’ immediately, and to start the crisis management by identifying and investigating the possible solutions. Such solutions may include, first of all, the following capital measures:
- Additional payments: the shareholders may provide the additional payments to a limited liability company. It is important to note, that additional payments may only be declared if the articles of association include the possibility of such payments. The amounts of payments and the schedule shall be precisely determined in the shareholder’s resolution. Additional payments are refundable to the shareholders if they are not required for covering the loss disclosed in the financial statements. The repayment of the additional payments is made on a pro rata basis to all shareholders.
- Capital increase: another possible way to provide financing is a share capital increase as a result of which new financial resources are channelled into the company. It is possible to structure the capital increase such that only a part of the shareholders’ contribution goes to the registered capital, while the remaining part increases the supplementary capital. Companies might have received shareholder loans in the past from their parent company. In this case it is also possible to convert it into equity. Tax implications should be however taken into account.
- Loans: if any of the shareholders of the company has the resources, such shareholder may bail out the company from the distress situation by way of intra-group financing in the form of shareholder’s loans. Later, such shareholder’s loans may also be used for the purposes of a capital increase (see above).To the extent possible, based on its credibility and indebtedness, the company may also rely on external financing (i.e. bank loan, overdraft facility).
Finding the right solution for individual businesses may not be obvious. Numerous factors have to be considered including the level of indebtedness, available financial resources, creditability of the company as well as group-structure and other group policies.
