The conversion of claims against a company into share capital represents one of the methods for increasing the share capital of a limited liability company.
The procedure for increasing the share capital begins with a resolution of the general meeting, after which a registration application is submitted to the Business Registers Agency, together with the relevant documentation.
Although the legal framework is relatively clear, certain practical dilemmas and contentious issues often arise. This article considers the two most common issues encountered by limited liability companies when initiating this procedure.
Must Previously Subscribed Contribution Be Paid, i.e., Fully Provided?
When converting a claim into the company’s share capital, the creditor may be either a member of the company or a third party joining the company. Therefore, it is important to be familiar with the legal provisions on increasing the share capital, which differentiate between these two situations.
Where a third party joins the company, the resolution to increase the share capital may be adopted even before the full payment, i.e., the provision of contributions by existing members, provided that the joining member simultaneously pays, i.e., provides in full their contribution.
However, the situation becomes more complex where an existing member wishes to make a new monetary or non-monetary contribution while a previous contribution has not been fully paid, i.e., provided. In such a case, the company’s share capital may only be increased by a new non-monetary contribution from an existing member, on the condition that the non-monetary contribution is provided immediately and in full. The company’s share capital cannot be increased by a new monetary contribution from an existing member if previously subscribed capital has not been fully paid, i.e., provided.
Is the Claim Converted Into Monetary or Non-Monetary Capital?
Depending on the nature of the claim, it may be converted into either monetary or non-monetary capital.
For a claim to be converted into monetary capital, the funds must actually have been paid into the company’s account. Proof of this requires a bank statement confirming that the relevant amount has been paid to the company’s account for a purpose that did not result in an increase in capital. A typical example of this situation is a claim arising under a loan agreement.
If the claim does not arise from a payment of funds into the company’s account but, for example, from delivered goods or provided services, such a claim can only be converted into non-monetary capital. In this case, it is necessary to provide appropriate evidence that the company has acquired certain assets or rights giving rise to the creditor’s claim.
It is important to note that even when the principal claim is converted into monetary capital, any associated interest claim can only be converted into non-monetary capital, as it does not represent funds paid into the company’s account.
Conclusion
The conversion of claims into share capital represents an effective mechanism for strengthening a company’s capital structure, requiring careful legal analysis and proper application of statutory provisions.
It is particularly important to verify whether previously subscribed contributions have been fully paid, i.e., provided, as this determines the subsequent possibilities for increasing the share capital. It is also necessary to determine the legal nature of the claim to establish whether it is converted into monetary or non-monetary capital.
It is recommended that the procedure for converting claims into a company’s share capital be carried out with prior professional advice to ensure full compliance with applicable regulations. In this way, a company can strengthen its capital structure effectively and safely while minimising potential legal and financial complications.
This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.
Author:
Milena Djukić, Associate
milena.djukic@prlegal.rs; legal@prlegal.rs;