Once the financial year has closed and the loss of half of the share capital is confirmed, the management body (either the board of directors or the sole directors/management, depending on the corporate form) becomes legally obliged to act.
The law requires directors to promote a formal corporate response by convening the shareholders to deliberate on the structural measures necessary to restore the company’s equity position or, alternatively, to resolve upon an orderly winding-up of the company.
In this context, Article 35 of the CSC provides that the management body must submit to the shareholders a proposal to adopt appropriate measures, namely the dissolution of the company or a reduction of its share capital. Such proposal must be brought before the general meeting, typically at the meeting convened to approve the annual accounts or, if this does not occur within that framework, at a general meeting specifically convened for this purpose, within the applicable statutory timeframe. Where material decapitalisation has occurred, shareholders must formally determine the company’s course of action, either by pursuing financial restructuring and recapitalisation, or by acknowledging that the corporate project should come to an end.
The regime set out under Article 35 of the CSC is essentially preventive and corrective in nature, allowing the company to continue its business provided that appropriate remedial measures are adopted to restore its financial soundness. In practice, the company’s continuity may be safeguarded through the replenishment of equity to adequate levels, in particular by means of shareholders’ contributions, recapitalisation transactions, strengthening of own funds, or a reorganisation of the share capital.
The solutions most commonly adopted include: (i) a share capital increase; (ii) supplementary shareholder contributions (where applicable); (iii) conversion of shareholder or third-party debt into equity; (iv) waiver of shareholder loans/claims; (v) additional contributions aimed at reinforcing the company’s equity; and (vi) a reduction of share capital to absorb losses, depending on the relevant corporate framework and the financing strategy pursued.
Following the implementation of any such measures, the company should present an improved equity position so that it no longer falls within the statutory alert threshold provided for in Article 35 of the CSC.
The legislature intended to ensure that the continuation of the business is permitted only where there is an effective restoration of a minimum level of financial equilibrium, thereby reducing the risk of further deterioration of liabilities and protecting creditors, suppliers and other third parties dealing with the company.
Inaction may be particularly detrimental. Failure to comply with the duties to convene shareholders and submit the requisite proposals, the absence of timely remedial action upon the occurrence of capital loss, and the persistence of the company in a state of undercapitalisation may expose directors to liability, including, in certain circumstances, regulatory/administrative liability, civil liability, and criminal liability for breach of corporate duties.
Furthermore, such situations may give rise to internal disputes, significantly affecting shareholder relations, as well as an increased risk of litigation, particularly where creditors hold material exposures or where minority shareholders closely monitor compliance with the statutory regime.
For these reasons, the loss of half of the share capital should be treated as a genuine “legal event” in the life of a company, requiring prompt action and a strategically structured response. It is not sufficient to merely identify the issue; it is necessary to determine the most effective corporate route, assess the accounting and tax implications, prepare the relevant corporate documentation (notices of meeting, proposals, resolutions, minutes and, where applicable, filings and registrations), and ensure that the recapitalisation or equity restructuring measures adopted are legally sound, sustainable and enforceable.
In conclusion, Article 35 of the CSC is not merely a formal obligation.
It is a corporate governance and capital maintenance mechanism that demands planning, accuracy and immediate action. Proper implementation may represent the difference between a controlled recovery and an escalation of risks leading to litigation, corporate deadlock and judicial dissolution.
Belzuz Abogados, S.L.P. – Branch in Portugal is an international law firm, headquartered in Madrid with offices in Lisbon and Porto, and is available to assist companies facing a loss of half of their share capital, supporting the definition of the legal and corporate strategy, the preparation of shareholders’ resolutions and registration filings, and the implementation of recapitalisation measures and equity restructuring in a secure and efficient manner.