Increasing Equity Capital – Fulfillment of the New Hungarian Civil Code ObligationTIONS

Have you considered how your limited liability company will fulfil the minimal equity capital of 3,000,000.- HUF (approx. 9640 €) obligation prescribed by the new Hungarian Civil Code? Are you currently completing your 2014 accounting records? In our most recent client alert, we cover how companies may be able to use profit-after-tax from the 2014 business year to cover the required equity capital increase and keep from digging deep in their pockets for the necessary funds.

The new Hungarian Civil Code (hereinafter referred to as: “new CC”), entered into effect on March 15, 2014 and includes new requirements regarding the equity capital of limited liability companies (hereinafter referred to as LLC/LLCs or company/companies): LLCs must adopt a decision to increase the equity capital from the 500,000 HUF previously required (approx. 1600 €) to 3,000,000.- HUF (approx. 9640 €) by amending their Articles of Association by March 15, 2016. The actual increase in equity capital, however, can occur later.

However, many companies don’t realize that they have several options to fulfil the capital increase obligations. They can not only increase their equity capital by cash contribution (payment of new shares) or by contribution in kind (which may be an asset as well as a member loan), but also by using other components of the capital – excess of equity capital – as retained earnings as well.

The last option is particularly interesting at the moment, since most LLCs are currently in the process of completing their books for the 2014 business year, meaning they are in the midst of adopting, depositing and publishing their annual reports and deciding on how to use their profit-after-tax. For many, it might make sense to consider not paying a certain amount of profit earned in 2014 or a part thereof as dividend, but rather including it in retained earnings in order to later use it to increase the equity capital. “Early savings” may prove a particularly attractive option since the 2015 annual reports may not be finished by the March 15, 2016 deadline and therefore not available to meet the 2016 requirement.

The company court has stipulated only one requirement regarding the above described solution: that the collateral security of such equity capital increase has to be certified by the company’s annual reports or by an interim balance sheet dated within the past six months.

Another option would be to combine methods and increase part of the equity capital through excess equity capital (retained earnings) and part through cash payment and/or by contribution in kind.

However, LLCs that do not have enough capital available to increase the equity capital up to 3.000.000,- HUF should not be too concerned. In accordance with the new CC, the Articles of Association may prescribe that members shall provide less than half of the cash capital contribution by submitting a request to the company registry. The Articles of Association may also set the deadline over a year later for cash contribution not provided by submitting the company registry request. The risk of doing so, however, is that the members shall bear liability for the LLC’s debts up to the yet unpaid part of their cash contribution. Also the LLC is not allowed to pay out any dividends until the unpaid profit calculated relative to the members’ core deposits reaches the equity capital together with the cash contributions already provided by the members.

Even LLCs with an equity capital of 3.000.000,- HUF or more, are still required to adopt the decision on the company’s continuation under the scope of the new CC, submit the necessary documents to the company court, and amend their Articles of Association in accordance with new CC. What eases the process a bit, however, is that the Articles of Association do not have to be amended if the amendment would only be necessary due to the decision regarding the company’s continuation under the scope of the new CC. In other words, the Articles of Association do not have to be amended if they already adhere to the stipulations of the new CC. However, it would definitely be wise for LLCs to consult an attorney to be sure that the Articles of Association indeed fulfil the new requirements. Moreover, LLCs will not have to pay procedural duty and a publication fee if the amendment is only necessary to fulfil the obligations of the new CC and/or the application of derogating rules.

Please be sure to forward the above information to individuals within your LLC authorised to make decisions regarding fulfilment of new legal obligations.

We would be happy to assess whether your LLC’s Articles of Association need amended or what other steps might be necessary to comply with the new CC. Timing is of the essence to ensure that you are able to take advantage of the best solutions for your business. Contact us to help.