Legal Framework — Article L.223-42 of the French Commercial Code (Updated 2023)
When a French limited liability company (SARL) decides not to dissolve after its equity has fallen below half of its share capital, it must reconstitute its equity within a legally defined period. This obligation ensures that the company restores a sound financial base and maintains creditor confidence.
The reconstitution of equity (reconstitution des capitaux propres) may be achieved through a capital increase, profit generation, or a combination of financial restructuring measures.
1. Legal Deadline and Calculation
Two-Year Period to Restore Equity
If the company decides to continue its operations, it must, by the end of the second financial year following the one in which the losses were recorded, restore its equity to at least half of the share capital or, alternatively, reduce the share capital so that the equity equals at least half of that reduced capital (Article L.223-42 para. 2).
Since Law No. 2023-171 of 9 March 2023, failing to regularise within this two-year period no longer allows any interested party to seek judicial dissolution. Instead, an additional phase of regularisation applies if the company still fails to comply.
How the Two-Year Period Is Calculated
The Ministry of Justice clarified that the period starts from the date of the ordinary general meeting that approved the accounts showing the loss, not from the closing date of the fiscal year in which the loss occurred.
Example
If losses occurred during the financial year ending 31 December 2023, and the shareholders approved the accounts in June 2024, the company must restore its equity by 31 December 2026. Its financial position will be assessed as at that date.
2. Early Regularisation (Before the Two-Year Deadline)
To speed up the recovery process, shareholders may decide to increase the share capital immediately after the approval of the accounts that showed the loss—within the four-month period reserved for deciding whether to dissolve or continue.
By approving a capital increase, shareholders implicitly indicate their will to continue operations. However, the Ministry of Justice insists that the shareholders’ consultation on whether to dissolve remains mandatory due to the seriousness of the situation.
The two resolutions (continuation and capital increase) may be considered during the same extraordinary general meeting.
Our corporate lawyers structure capital increases and legal filings to comply with Article L.223-42 and safeguard your SARL’s continuity.
3. Subsequent Losses After the Decision to Continue
Once shareholders have decided to continue the business without immediate regularisation, a new consultation is not required if additional losses occur in the following financial year.
However, when the company later proceeds with the regularisation, those new losses must be included in the equity calculation.
Naturally, shareholders may at any time decide on voluntary dissolution if continued losses make recovery unrealistic.
Example
A SARL with €50 000 capital reports, as at 31 December 2022, equity of only €5 200.
The June 2023 shareholders’ meeting notes this situation. On 29 October 2023, an extraordinary meeting rejects dissolution. The company must therefore restore its equity to at least €25 000 before 31 December 2025.
If by that date the company has not restored equity and its capital exceeds 1 % of total assets, it must reduce its capital below that threshold by 31 December 2027. Otherwise, dissolution may be requested in court.
4. Comparison Elements for Assessing Regularisation
At the end of the second financial year following the loss, the company’s position is assessed by comparing its equity with its share capital.
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The equity used for this calculation must include any profits or new losses recorded up to that date.
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The capital to be compared is the capital in force when shareholders decided to continue, or—if modified since—that new amount.
In practice, if subsequent profits raise equity above half the capital, the company is considered automatically regularised. The law requires reconstitution of equity, not complete elimination of all past losses.
5. How to Reconstitute Equity
(a) Capital Increase
The most direct method is to increase share capital, through new cash contributions or in-kind contributions.
Simple incorporation of existing reserves would not improve equity, since it merely reclassifies internal funds.
Before voting, shareholders must receive detailed information on the reasons, magnitude, and purpose of the capital increase in view of the company’s future prospects (Cass. com. 20 March 2007, n° 05-19225).
A capital increase may also occur through conversion of shareholder loans (current accounts) into equity, by offsetting liquid and payable claims.
Practical Effects
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Conversion of shareholder loans changes the ownership distribution, unlike a simple waiver of the same debt.
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The increase generally doubles the amount of the equity shortfall, while a pure waiver can be limited to the shortfall itself.
This method is often chosen by institutional or individual shareholders who wish to maintain or strengthen control of the company.
We assess your balance sheet, draft resolutions, and guide you through capital reduction or recapitalisation steps.
(b) “Accordion Operation” — Reduction Followed by Increase
Frequently, the capital increase is preceded by a capital reduction to absorb losses, followed by a new increase—a restructuring known as a coup d’accordéon (“accordion operation”).
This two-step approach first clears accumulated losses from the balance sheet before injecting new funds.
Why?
Because new investors (or even existing shareholders) will not agree to inject fresh capital into a company whose balance sheet still shows unrecovered losses.
The operation allows the company to start afresh, ensuring that future dividends can be distributed normally.
It is also possible to reverse the order—increase capital first, then reduce it—if losses exceed the total capital and other solutions cannot be combined.
(c) Conditions for Validity
Courts have ruled that the coup d’accordéon must serve the company’s legitimate interest and not the personal interests of majority shareholders.
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The operation is lawful when its purpose is to preserve the company’s continuity (Cass. com. 17 May 1994, n° 91-21364).
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It remains valid if it does not constitute an abuse of majority power (Cass. com. 25 Jan 2005, n° 02-18269).
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It has been upheld where it benefited a purchaser in an amicable settlement and all shareholders were treated equally (Cass. com. 18 Jun 2002, n° 99-11999).
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Conversely, it was annulled when used solely to allow a majority shareholder to gain full control of the company (Cass. com. 11 Jan 2017, n° 14-27052).
Therefore, every capital reorganisation must be carried out in the company’s best interest, transparently and proportionally.
6. The Reconstitution Process in Practice
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Assessment: Verify equity status at the end of each financial year.
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Legal Consultation: Determine whether a capital increase, reduction, or hybrid restructuring is needed.
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Shareholder Decision: Hold an extraordinary general meeting to approve the operation.
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Publicity: Publish legal announcements and file updated statutes with the Commercial Court registry.
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Follow-Up: Monitor subsequent financial statements to confirm restored equity.
7. Key Lessons
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The two-year deadline runs from the approval of the accounts showing the loss, not the date of loss.
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The 2023 reform abolished automatic judicial dissolution for failure to regularise within this period.
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Early action—capital increase, profit generation, or “accordion” restructuring—is the safest approach.
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All operations must be taken in the company’s social interest and recorded through proper shareholder resolutions.
FrenchCo.lawyer assists company directors in anticipating legal deadlines and documenting full regularisation under French law.
Conclusion — Equity Reconstitution as a Strategic Obligation
Reconstituting equity is more than a compliance exercise; it is a strategic act of corporate survival.
A company that quickly restores its capital base demonstrates financial discipline, reassures creditors, and prevents legal risk under Article L.223-42 of the Commercial Code.
For managers, the key is anticipation: identifying the equity shortfall early, consulting professionals, and executing a coherent recapitalisation plan before the legal deadline.
FAQ — Reconstituting Equity in a French SARL
1. What is the legal deadline?
Two financial years after the general meeting that approved the accounts showing the losses.
2. What happens if the company does not regularise in time?
Since 2023, the company is not automatically dissolved, but a new phase of regularisation may follow.
3. Can equity be restored by profits alone?
Yes, if subsequent profits bring equity above half of the capital, the company is considered regularised.
4. What is an “accordion operation”?
A capital reduction to offset losses followed by a capital increase to restore the company’s balance sheet.
5. Who decides on capital changes?
Shareholders in an extraordinary general meeting, under statutory majority requirements.
