Capital Loss in Companies
- 2 minute read
- Legal & Corporate Law
Capital loss is used for situations where a company’s equity is less than half of it’s share capital. When this is the case, the company’s management must ensure that a general meeting is held. And this must be no later than 6 months after the moment when the capital loss is discovered.
At this general meeting following a capital loss, the central management must report on the company’s financial position. If necessary, the central management must also make proposals for what measures should be taken. And this could include whether the company should be dissolved.
Examples of situations with capital loss
Capital loss is defined based on whether the company’s equity is less than half of the company’s share capital. Therefore, the limit for how low the equity must be will depend on the company’s share capital.
Example 1: A capital company has a share capital of DKK 400,000. Then the company will be in a capital loss situation when the equity is less than DKK 200,000.
Example 2: A capital company has a share capital of DKK 1,500,000. Then, the company will already be in a capital loss situation when the equity becomes less than DKK 750,000.
Central Management's resposibilities regarding capital loss
Notice for the general meeting:
In companies that have both an executive board and a board of directors, both bodies are responsible for calling for a general meeting relating to the capital loss.
At this general meeting, the central management must report on the company’s financial position. Furthermore, the must come up with proposals for what measures should be taken. It could, for example, include options for how the capital can be re-established. This could be by bringing in new investors, reducing assets in order to reduce liabilities, or in other ways increasing the share capital.
The 6 months rule:
In general, the company’s management must ensure to call for a general meeting which is held no later than 6 months after becoming aware of the capital loss. However, the capital loss can be included as an independent item on the agenda of e.g. the annual general meeting, if this has already been called for. Alternatively, an extraordinary general meeting must be called for.
The management’s responsibilities:
According to the Danish Companies Act’s rules regarding capital loss, the management must call for a general meeting, as described above. If the management does not live up to this obligation, they may be held liable for any losses that could arise as a result. It could be, for example, that the company cannot pay its creditors, or forced liquidation.
In addition, the management has a general responsibility for ensuring preparedness for situations such as capital loss. In these situations, the management can be held accountable to creditors and other stakeholders.