What are share capital and equity?
According to current Estonian legislation, every private limited company is required to have a contributed share capital. Share capital is a certain amount of money that is paid in by the shareholders before the formation of a private limited company.
Net assets or Equity are basically total assets minus total liabilities of the company on a balance sheet.
What is the minimum share capital requirement?
Nowadays, Estonian law allows to incorporate an OÜ (a private limited company) with a share capital of at least 1 cent. Prior to the new version of the Commercial Code 2023, the minimum share capital for a private limited company was €2,500, but there was also the possibility to establish such a company without making a share capital contribution. In the revised code, there is no such possibility.
What happens if Net Assets fall below the minimal net assets limit?
Business owners and managers must remember that the net assets of their company (total assets minus total liabilities) cannot fall below a certain limit. For limited liability companies established without a share capital contribution in accordance with the old version of the law, the minimum limit is €0. However, in the case of a private limited company whose capital has been fully paid up or which was incorporated after February 1, 2023, the lower limit is half of the share capital.
Keeping this minimum limit in mind, maintaining the required amount of equity is necessary for the maintenance and operation of a private limited company. The Estonian Business Register can verify net assets using the annual accounting reports submitted, and if the registry discovers that the capital fell below the established limit, the Estonian Commercial Register may issue a corresponding regulation with a request to take the necessary measures to remedy the situation. If, however, the board and the shareholders of the private limited company fail to act in a timely manner, the Commercial Register may, at its own discretion, wind up the company.
In the past, the Estonian Commercial Register did not, as a rule, use measures such as deleting companies from the register, but today the Commercial Register acts much more strictly. There are also much harsher controls nowadays with regard to the timely filing of annual accounting reports. Net assets falling below a set limit or failure to submit an annual report in due time now may result in the company being deleted from the register.
What can be done if your net assets decrease below the legal minimum?
Of course, the shareholders of a private limited company have options for resolving the situation and preserving the company. Here’s what can be done, according to the law¹:
1) Reduce the share capital
In case your net assets fall below 50% of the shareholders’ equity but are still above 0, the easiest thing to do may be to decrease your shareholders equity. This can be done by a simple resolution of the shareholders. Sometimes a change in the Articles of Association may be necessary.
2) Increase the share capital
Alternatively, the shareholders may decide to inject some additional capital into the company, either by transfering money to the company or providing the company with some other assets. In this way, the equity can be restored to a positive figure.
3) Waive shareholders’ claims against the company
If the shareholders had previously provided loans to the company, when net assets decrease below legal minimum, the shareholders may consider waiving their claims, either fully or partially. This can be done by a simple letter or agreement between the shareholder and the company. The good thing about this step is that it does not require any formal applications to the Commercial Registry, therefore minimizing the paperwork.
4) Merge the company with another company
If you have another company in Estonia, you may consider merging them into one company in a way that the net assets of the merged company would amount to at least half of its share capital.
5) Liquidate the company
It may well be that the business project for which you originally started the company has ended and there is no point in keeping the company going. If the shareholders do not wish to continue the company’s business, they may choose to liquidate the company. This is of course only possible if the net assets are still positive.
6) File for bankruptcy
In all the above mentioned scenarios, the net assets falling below minimum is only a temporary situation, your business plan is still viable and you have the resources to keep the company going. However, it may be the case that net assets falling below 0 actually shows that the company is insolvent, that is unable to pay all its debts in the long run. In this case the management board should file for bankruptcy. This is tough, but in some situations, the sooner this decision is made, the better it is. In fact, failure to file for bankruptcy in time may itself constitute an offense against the law. In simple words, if you see that the business has failed, you should make this information public sooner, rather than later.
How Magrat can assist
If your company’s net assets have fallen below the allowed level, it can be difficult to find the most efficient method to resolve the situation. Our experienced lawyers and accountants are ready to assist you in finding a suitable solution and the best ways for its implementation. If you see that you have a problem with net assets falling below minimum or if you receive a ruling from the Estonian Business Register describing an issue discussed in this article, do not hesitate to contact us. We can help you resolve the situation quickly and effectively.
Summary
We discussed a financial situation called negative equity in Estonian companies and explained that companies must have a certain amount of money called the share capital, and negative equity happens when a company’s total debts are more than its total assets. The law sets a minimum amount for net assets of the company, and if a company’s net assets fall below this limit, there can be serious consequences, such as forced liquidation of the company.
To fix this problem, there are several possible solutions. These include:
- changing the amount of share capital,
- getting more money from shareholders,
- merging the company with another company
If things don’t improve, the company might need to:
- close down or
- declare bankruptcy.
Magrat SFAI Estonia can help businesses facing these issues find the best solutions. In case of a problem with net assets, we encourage business owners and managers to seek help. Do not hesitate to contact the team at Magrat OÜ to solve the problem and get your business back on track.
1 Section 176 of the Commercial Code