Continuing After a Loss of Half the Share Capital — The Second Phase of Regularisation
After deciding to continue operations despite equity (capitaux propres) falling below half of the share capital, a SARL must not only reconstitute its equity within two financial years (as explained previously) but also ensure that this reconstitution is effective and properly documented.
The process may involve a capital increase, a debt waiver by shareholders, or a free revaluation of assets — each method carrying specific legal and tax consequences.
If the situation remains unresolved after two years, the 2023 reform introduces an additional two-year capital reduction phase, ensuring that the company’s equity aligns with its balance sheet structure.
1. Calculating the Minimum Capital Increase Required
When a company chooses to restore equity through a capital increase, determining the minimum increase necessary to bring equity to at least half the share capital is essential.
Formula
Let:
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C = share capital before the increase
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CP = equity before the increase
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x = amount of the capital increase
The target is:
CP + x = 0.5 (C + x)
Solving for x gives:
x = C – 2CP
Example
If C = €24,000 and CP = €10,000:
x = 24,000 − 20,000 = €4,000.
A capital increase of €4,000 restores the balance — the equity then equals half of the new share capital (€14,000 vs €28,000).
Note: When the reconstitution is planned based on accounts prepared close to the legal deadline, the company must estimate its expected year-end equity to finalise the capital increase before closing.
This formula applies only when there is no prior capital reduction (i.e., no “accordion” operation).
2. Other Methods to Restore Equity
(a) Shareholder Debt Waivers (Abandon de créances)
When a company has sustained significant losses, its main shareholders may voluntarily waive repayment of shareholder loans or other advances to restore the company’s financial position.
This technique is often used by parent companies helping subsidiaries recover from losses.
However, caution is essential when both the creditor and the debtor companies share common shareholders with unequal ownership interests, as this can constitute inequality between shareholders or even misuse of corporate assets (abus de biens sociaux).
Tax Treatment:
Under Article 39, 13° of the French General Tax Code (CGI):
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Commercial waivers (granted for business reasons) are tax-deductible;
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Financial waivers (granted for non-commercial reasons) are not deductible.
Exceptions for Companies in Difficulty:
Debt waivers — whether commercial or financial — are deductible when granted as part of a:
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court-approved conciliation agreement (article L.611-8 C. com.),
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safeguard plan (articles L.626-1 et seq.), or
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judicial recovery plan (articles L.631-1 et seq.).
In these cases, the deductible portion equals the negative net equity of the beneficiary, and the excess is deductible in proportion to other shareholders’ holdings.
(b) Free Revaluation of the Balance Sheet
A SARL that owns long-standing fixed assets — such as real estate or investments — may opt for a free revaluation (réévaluation libre) to increase equity.
This involves restating assets at their current value, with the difference recorded as a “revaluation surplus” under equity.
However, this surplus cannot directly offset losses (Article L.123-18 C. com.), since equity reconstitution does not necessarily imply clearing past losses.
Still, a capital increase by incorporating the revaluation surplus, followed by a capital reduction, can indirectly achieve the same effect.
Scope of the Revaluation
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The revaluation must apply to all tangible and financial assets, not selectively.
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Intangible assets (goodwill, trademarks, etc.) cannot be revalued.
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The revaluation is meaningful only if assets still have future earning potential or can be separated from the company’s operations (AMF, former COB Bulletin, Oct. 1982).
Tax Regime and COVID-19 Exception
The revaluation surplus is normally taxable as income.
However, under Article 238 bis JB CGI, companies that revalued assets between 31 December 2020 and 31 December 2022 could opt for:
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15- or 5-year spread taxation for depreciable assets, or
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deferral of taxation for non-depreciable assets.
This temporary measure was introduced to ease post-pandemic recovery.
Our lawyers assess your balance sheet and determine the optimal capital increase to restore compliance with Article L.223-42 of the French Commercial Code.
3. Formalities After Regularisation
While the law expressly requires publicity for decisions on continuation or dissolution, it is silent on the formalities following equity restoration.
Nevertheless, companies should act prudently:
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When equity has been restored (through profits, capital increase, or revaluation), the company should remove the warning mention registered at the Commercial Court (RCS).
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This requires filing the minutes of the general meeting that recorded the reconstitution (CCRCS Opinion No. 2013-034).
Failing to remove this mention may harm the company’s reputation with banks, suppliers, and potential partners, who consult the public register.
Updating the Trade Register
The Ministry of Justice confirmed that a company may request a modifying entry at the RCS to reflect the reconstitution, even without publishing a new legal notice.
If difficulties arise, the request can be submitted to the judge supervising the register.
4. The 2023 Reform: Additional Two-Year Regularisation Period
The Law of 9 March 2023 (No. 2023-171) introduced a new two-year phase following the initial regularisation period.
If, after two years, the company has not restored its equity and its share capital exceeds 1% of total assets, it must reduce its capital to a value equal to or below that 1% threshold within the next two years (Articles L.223-42 and R.223-37 C. com.).
Otherwise, it risks judicial dissolution.
This mechanism ensures that the company’s capital structure reflects its true financial position, avoiding inflated capital that no longer corresponds to available equity.
FrenchCo.lawyer guides you through each available option — capital increase, revaluation, or reduction — ensuring full legal and tax compliance.
5. Capital Below 1% of Total Assets
After the full four-year period from the year the losses were recognised, if the company has not reconstituted equity, it must reduce its capital below 1% of total assets recorded at the last balance sheet date.
This capital reduction, though extreme, may be necessary to avoid dissolution.
Practical challenges include:
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avoiding a negative capital figure, which is legally impossible,
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handling fractional shares (“rompus”) when reducing the number of shares — a situation that may require adapting the company’s bylaws.
The reduction amount is now freely determined, since the 2023 reform removed the previous statutory minimum for SARL capital.
6. Sanctions for Non-Compliance
If the company fails to reduce its capital below the required 1% threshold, the same sanction applies as in cases where the manager fails to convene shareholders within four months of loss recognition:
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Any interested party may apply to the Commercial Court to request dissolution (Article R.223-37 C. com.).
This includes shareholders, creditors, competitors, or other affected parties with a legitimate interest.
In such proceedings, the tribunal may again grant a six-month grace period if the company acts in good faith to regularise.
Conclusion — The Final Safeguard Before Dissolution
Reconstituting or reducing share capital under Article L.223-42 is the last legal safeguard before a company faces dissolution.
A timely capital increase, revaluation, or reduction not only restores compliance but also reassures creditors and investors of the company’s stability.
Ignoring these obligations, on the other hand, exposes managers to severe risks — including judicial liquidation or personal liability if the company’s insolvency worsens.
In today’s regulatory landscape, companies must manage their equity like a strategic resource — balancing capital structure, profitability, and compliance with the evolving French Commercial Code.
We assist managers in completing second-phase capital reductions and updating the Trade Register before sanctions apply.
FAQ — Capital Reconstitution and Reduction in French SARLs
1. How long does a SARL have to restore equity?
Two financial years after the shareholders approve the accounts showing the loss.
2. What happens if equity is not restored within that time?
The company has a further two years to reduce its capital below 1% of total assets.
3. Is a capital reduction always required?
Only if equity remains below half the capital after the two-year reconstitution phase.
4. Are shareholder debt waivers taxable?
Commercial waivers are deductible; financial ones are not, unless granted to companies in official restructuring.
5. Can a company use asset revaluation to restore equity?
Yes, provided all tangible and financial assets are revalued uniformly, and tax rules are observed.
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.
