UNPAID CAPITAL CONTRIBUTION IN A HUNGARIAN LLC? HOW TO SOLVE THIS PROBLEM?

01 July 2020

The „start-up capital” of the limited liability company is the initial capital which is the totality of the capital contributions provided by the shareholders. Since the shareholders may declare that the capital contribution shall only be provided after the establishment of the company in a later date, the painful situation might occur that the shareholder does not provide or only partly provides the capital contribution. Given that this may create unwanted consequences, the settlement of the capital-related problem is the common interest of the shareholders. In this article we summarize the possible methods to solve this issue.

1. The consequence of the delay

In case the shareholder does not provide his capital contribution in the deadline set forth by the articles of association, the management shall warn the shareholder to provide the contribution. Should the shareholder miss the 30 days’ deadline, his membership in the LCC terminates by the power of law.

In case the shareholder or the company would like to avoid this situation, the following methods are available based on the Civil Code.

2. Extension of the deadline

As we already mentioned the capital contribution may be provided after the establishment of the company. Though the deadline of the provision of the in-kind contribution cannot be longer than 3 years as of the registration of the company, in relation to the cash contribution the Civil Code does not set forth a similar restriction which means that theoretically it may be provided after several years.

If it is likely that the shareholder will not be able to provide his capital contribution in the original deadline set forth by the articles of association, the deadline may be extended. This requires the amendment of the articles of association which in this case can only happen with the unanimous decision of the shareholders.

The agreement among the shareholders is not certain given that the extension may place a heavy burden on the other shareholders as well: In case the shareholders set a deadline longer than one year as of the date of the registration to provide the cash contribution, the possibility to pay dividends to the shareholders is limited and the shareholders shall be liable for the debts of the company to the extent of the unpaid part of the cash contribution.

To sum up, this solution is cheap and simple but considering the risk affecting the other shareholder, it may only be realistic if there is a relationship of trust between the shareholders.

3. Transfer of the business share

The transfer of the business share corresponding to the unpaid capital contribution might be an evident solution in case there is a buyer. In case the shareholder partly provided the capital contribution, his business share can be divided so he shall only sell the part proportionate to the unpaid capital contribution. Taking into account the person of the buyer the Civil Code differentiates between the below scenarios:

a. Transfer to another shareholder of the company

The business share may be transferred between the shareholders of the company without any restriction. In case of the transfer between the shareholders it is irrelevant that the capital contribution has not been paid, this may only affect the market value of the business share.

b. Transfer to the company

Based on the decision of the shareholders’ meeting the company itself may acquire the business share of a shareholder. Contrary to the acquisition by a shareholder the company may only acquire those business shares in relation to which the capital contribution was fully provided. The disadvantage of this method is that the company needs to “advance” the price of the business share in form of a loan which makes it possible for the shareholder to pay the capital contribution before the transfer of the business share. Further, the shareholders’ meeting shall approve the contracts between the company and the shareholder.

c. Transfer to a third party

Like in case of the acquisition by the company, the business share can only be transferred to a third party if the shareholder has fully provided the capital contribution. Thus, in this case the investor needs to provide a loan to the shareholder before the share purchase so that the shareholder can pay the capital contribution. Moreover in this case the other shareholders and the company may have pre-emption right which means that the shareholder can only sell his business share to the investor if the other shareholders or the company do not exercise their pre-emption right.

d. Conclusion

The transfer of the business share to an „internal” or „external” investor might be an evident solution. The transfer to the „internal” investor (other shareholder) does not imply a significant risk from legal point of view, the unsettled status of the business share and the risk resulting form it might discourage the external investor from buying the share. Further, the transfer to the external investor after the payment of the contribution from the loan provided by him, may raise the question that the deal was concluded by circumventing the law which might be an additional legal risk.

4. Decreasing the initial capital

Lastly, the most obvious but a more complicated and costly way is decreasing the initial capital. In this case the company decreases the initial capital with the amount of the (partly) unpaid capital contribution which will decrease the share of the affected shareholder. The shareholder will be released from his payment obligation, but his business share will be shrinking.

As mentioned, the procedure is rather complex as the decision about decreasing the initial capital shall be published and the company shall inform its creditors. In case the creditors request, the company shall provide appropriate safeguards so the that divestiture will not jeopardize the settlement of the creditors’ claims.

The long and costly procedure may be such a disadvantage in the practice which makes it worth to consider the other solutions.

5. Summary

It is proposed to prevent the capital-related problem of a limited liability company. The Civil Code provides more options to solve the issue which might make it possible to avoid the exclusion of the affected shareholder. Before taking the decision, we advise to think over the advantages and disadvantages of each solution so that the company and the shareholder will be able to choose the most optimal scenario.