Equity Shortfall

When a company's Board of Directors discovers that the company's equity is negative, the Board must, without delay, submit a notification to the National Board of Patents and Registration regarding registration of loss of share capital. The Board may discover the matter either during preparation of annual accounts or during the day-to-day operations, for instance as a consequence of the company’s regular financial reporting. For the purposes of calculating the equity shortfall, other accounting related items such as subordinated loans and accrued depreciation difference (i.e. difference between actual and planned depreciation of assets).

The register entry regarding loss of share capital can be removed by submitting a new notification for registration, once the equity has increased above fifty per cent of the share capital. The notification shall be accompanied by a balance sheet and other applicable statements which shall be audited if the company is under an obligation, whether pursuant to statute or its Articles of Association, to elect an auditor.

As regards public limited liability companies, the Board of Directors must prepare the financial statements and annual report without delay, if it discovers that the company’s equity is less than half of the share capital. If, according to such balance sheet, the equity of the company is less than one half of the share capital, the Board of Directors must without delay convene a general meeting of shareholder to consider measures to remedy the company's financial position. Such general meeting must be held within three months from the date of the relevant financial statements.

A breach of the aforementioned provisions, for instance a failure by the Board of Directors of a public limited liability company to convene a general meeting of shareholders in breach of the obligation to do so, may result in the company's management becoming liable for damages [Liability of the Management]⁠. Such liability may mainly be applicable with respect to damages incurred by creditors.