Loss of equity
The duties of the company’s Board of Directors include monitoring the company’s equity. If the company’s board of directors finds that the company has lost, or is about to lose equity, it must take steps to safeguard equity.
When calculating the adequacy of equity, a capital loan in accordance with the Limited Liability Companies Act can be included in the equity. Even if it is included in liabilities in the balance sheet. In addition, depreciation differences and voluntary provisions may be included as increases in equity. With special care, the probable transfer price of the company’s assets can also be calculated as an increase in equity. The condition is that the transfer price is permanently higher than the book value. The matter must also be reported in the annual report or in the notes to the balance sheet.
The company’s equity can be turned positive, e.g., by the following means:
- Loans in the balance sheet at the time of review can be converted into equity loans. Capital loans must meet the requirements of Chapter 12 of the Limited Liability Companies Act. The terms of the capital loan are weaker than the terms of other loans. The capital loan can be repaid and interest can be paid with less favorable terms. The company may not provide security for the loan.
- A share issue can be arranged in the company to improve the financial situation.
- The company can make an investment in the unrestricted equity reserve fund or issue a new capital loan.
If, after the audit calculation, the company’s equity is negative, the company’s Board of Directors must register it with the National Board of Patents and Registration. The negativity of equity does not prevent the company from continuing its normal operations. The purpose of registration is to bring the company’s financial situation to the attention of creditors. The registration is public and appears on the company’s trade register extract. Registration can have negative effects e.g., to obtain a loan or payment period from partners.
If the company’s Board of Directors fails to register the loss of equity, this failure will be noted in the auditor’s report. In addition, the members of the Board of Directors will be liable for damages if the lack of registration causes inconvenience to any party. If, for example, a supplier or a lender does not get their receivables out of the company in the event that its liquidity deteriorates, the members of the Board of Directors are liable for this damage if no negative equity has been registered.
When the company’s equity has risen to a level where the equity is more than half of the share capital, the registration of the negative equity can be removed with a new registration notification. The notification shall be accompanied by a balance sheet or other statement. If the company has an audit obligation, then this statement must be audited.