By: Rafael Alvarado
One of the causes for dissolution of companies in Guatemala is the loss of more than 60% of the paid-up capital (Article 237, numeral 4, Commercial Code), although it is a remediable cause.
As soon as the administrators become aware of such capital loss, they must record it in minutes signed by all and convene a shareholders’ meeting or general assembly of shareholders (depending on the type of company), which must be held as soon as possible and in any case within one month following the date of the minutes (Article 238, Commercial Code).
If the shareholders’ meeting or general assembly of shareholders decides to remedy the cause of dissolution and amend the bylaws to continue the company’s operations, or alternatively, to dissolve the company, the resolution must be formalized in a public deed, which must be registered with the Mercantile Registry (Article 238, Commercial Code).
In the event that the assembly decides to remedy the cause of dissolution, there are only two options to do so, before any distribution or allocation of profits can be made (Article 32, Commercial Code):
- Reimburse the lost capital; or
- Reduce the capital by at least the amount of the losses.
The reimbursement of lost capital is the act by which shareholders contribute an amount equal to or different from their previous contribution, in proportion to their shares, without receiving new shares in return. The purpose of reimbursing lost capital is to increase the equity affected by losses in order to restore its balance with the capital.
For example, if a company has a paid-up capital of Q.2,000,000.00 and accumulated losses of Q.1,500,000.00, and the assembly resolves to reimburse the lost capital, the shareholders contribute money or assets worth Q.1,500,000.00, which are recorded in the assets with a debit to the profit and loss account. The capital paid of Q.2,000,000.00 will continue to be shown in the equity accounts in the financial statements, and the accumulated losses item will disappear.
This contribution results in a real increase in equity that allows for the offsetting and elimination of accumulated losses. Once the reimbursement of lost capital has been made, there is an increase in equity without any change in the social capital. The social capital remains the same because there is no increase in the company’s paid-up capital. The paid-up capital remains as an unchanged ideal figure in the accounting and financial statements, and therefore, no new shares are issued.
This new contribution does not mean that the shareholder receives new shares, as the shareholder fully reimburses their lost portion. To complete the lost capital portion, the necessary amounts must be reimbursed to cover liabilities and ensure that the net equity equals the amount recorded as paid-up capital.
The reimbursement of lost capital is not a taxable event for income tax purposes, and it should not affect the entity’s gross income since the accounting entries will be made within the Statement of Financial Position.
The specific accounts that may be affected depend on the nature and type of assets to be contributed. For example, in the Current or Non-Current Assets section of the Statement of Financial Position, the contributions could be in the form of real estate, movable assets, cash, inventories, or others, and the counterpart should necessarily be a reduction in accumulated losses.
In the event that the assembly decides to reduce the capital, the corresponding shares must be canceled. Through this mechanism, the company is placed in a position to receive new contributions through a subsequent increase in paid-up capital.
If there is a cause for dissolution, and the shareholders decide to continue the company and amend the bylaws, creditors are entitled to the rights specified in Article 25 of the Commercial Code (which regulates the extension of the company) (Article 238, Commercial Code).
In this case, personal creditors of the shareholders and creditors of the company, whose claims are evidenced by executory instruments, have a period of 30 days, counted from the last publication (of the resolution to remedy the cause of dissolution and amend the bylaws), to protest the resolution (to continue the company) (Article 25, Commercial Code).
The effect of the protest is that personal creditors of the shareholders can exercise their rights over the debtor’s share participation, and the shareholders are jointly and severally liable for the company’s obligations (Article 25, Commercial Code, and Article 223 of the Commercial Code).
If, despite the existence of a cause for dissolution, no resolution is taken to allow the company to continue, any interested party may petition a Civil First Instance Judge, through summary proceedings, to declare the dissolution, order its registration with the Mercantile Registry, and appoint a liquidator in the absence of the shareholders (Article 25, Commercial Code).
The declaration of dissolution, if agreed upon, must be published ex officio by the Mercantile Registry, three times over a period of 15 days in the electronic media of the Mercantile Registry. Within one month following the last publication, any interested party may file a lawsuit to request the judicial cancellation of the dissolution registration if there was no legal cause for it (Article 239, Commercial Code).
Administrators cannot initiate new operations after the total dissolution resolution or the verification of a cause for total dissolution. If they contravene this prohibition, the administrators are jointly and severally liable for the operations undertaken (Article 240, Commercial Code).