Use and Distribution of a Company Assets in General
A company’s equity capital may decrease in two ways. Firstly, losses generated by unprofitable business naturally reduce the amount of unrestricted equity. Secondly, even other than so-called distributable funds can be gratuitously distributed within the limits set for distribution of assets in the Companies Act.
Use and distribution of a company’s assets has been strictly regulated in the Companies Act, both in order to protect creditors and minority shareholders, and to guarantee equal treatment of shareholders.
As regards limited liability companies with only one or a few shareholders, the requirements concerning creditor protection can, in fact, be regarded as the only absolute requirements set forth in the Companies Act, in addition to the provisions concerning accountability and reliable management of company assets. The purpose of the rules regarding distribution of assets is to ensure that the invested equity continues to carry the principal risk for the company’s business.
According to the Companies Act, the permitted distribution of assets is as follows:
distribution of profits (dividend) and distribution of assets from reserves of unrestricted equity;
reduction of share capital in compliance with the provisions of the Companies Act regarding, among others, protection of creditors and decision-making;
acquisition and redemption of the company’s shares by the company;
dissolution and deregistration of the company.
When distributing the company’s assets, the limitation regarding the company’s solvency must at all times be taken into account. According to this limitation, assets shall not be distributed if it is known, or should be known at the time of the distribution resolution that the company is insolvent or that the distribution will cause the company to become insolvent. Furthermore, distribution of assets must always comply with the provisions of the Companies Act regarding, among others, decision-making and creditor protection.
As a rule, all other forms of distribution of company assets are deemed to constitute constructive distribution of profits or, in other words, unlawful. Also business transactions, that reduce company assets or increase debt without any business motive, is regarded as unlawful. For further discussion on consequences of distribution of assets, see [184.108.40.206 Consequences of Unlawful Distribution of Assets].