Written by: Rafael Alvarado
One of the causes for the dissolution of companies in Guatemala is the loss of more than 60% of the paid-in capital (article 237 number 4 of the Commercial Code), although it is a rectifiable cause.
As soon as the administrators become aware of said loss of capital, they must record it in the minutes signed by all and must call a meeting of partners or a general meeting of shareholders (depending on the type of company), which must be held as soon as possible and in any case within the month following the date of the meeting (article 238 Commercial Code).
If at the meeting of partners or general meeting of shareholders it is decided to rectify the cause of dissolution and amend the corporate deed to continue its operations or alternatively agree to the dissolution of the company, the decision must be raised to a public deed, which must be registered in the Commercial Registry (article 238 Commercial Code).
In case the assembly decides to correct the cause of dissolution, there are only two options for this, before any distribution of profits can be made (article 32 of the Commercial Code):
The reimbursement of lost capital is the act by which the shareholders contribute again an amount equal to or different from what was previously contributed, in proportion to the shares they own, without receiving new shares in exchange for said contributions. What is intended with the reimbursement of lost capital is to increase the equity affected by losses, in order to restore its balance with the capital.
As an example, if a company has paid-in capital of Q.2,000,000.00 and accumulated losses of Q.1,500,000.00, and the meeting resolves the reimbursement of the lost capital, the shareholders then contribute money or goods for Q.1,500,000.00, which enter the assets with a debit to the profit and loss item. In the financial statements, the capital paid for Q.2,000,000.00 will continue to appear in the equity accounts and the item of accumulated losses will disappear.
With this contribution there is a real increase in equity that allows compensating and eliminating accumulated losses. Once the reinstatement of lost capital is produced, an increase in equity is generated without changing the capital stock. The capital stock remains the same, because there is no increase in the paid capital of the company. The paid-in capital remains as an ideal figure, unchanged, in the accounting and financial statements and, consequently, there is no issuance of new shares.
This new contribution does not mean that the partner receives new shares, since the shareholder fully repays his lost participation. To complete the lost capital quota, the necessary amounts must be repaid to cover the liabilities and so that there is a net worth with a figure equal to that which appears as paid-in capital.
The reimbursement of lost capital is not an event that generates Income Tax and should not affect the gross income of the entity, since the accounting items to be made will be made within the Statement of Financial Position.
The accounting accounts that could be affected depend on the nature and type of the assets to be contributed. For example, at the level of the Statement of Financial Position in Current or Non-Current Assets, the contributions could be: real estate, personal property, cash, inventories or others, and the counterpart would necessarily have to be, with effects on the reduction of accumulated losses, the latter.
In case the meeting resolves to reduce the capital, the shares must be canceled for the corresponding amount. With this mechanism, the company is placed in a position to receive new contributions through a subsequent increase in paid-in capital.
If there is cause for dissolution, and the partners decide to continue the company and modify the company deed, the creditors enjoy the rights set forth in article 25 of the Commercial Code (which regulates the extension of the company) (article 238 Commercial Code).
In this case, the personal creditors of the partners and the creditors of the company, whose credit is recorded in a title that meets the enforceability requirements, enjoy a term of 30 days, counted from the last publication (of the agreement to remedy the cause of dissolution and modification of the company deed), to protest the resolution (to continue the company) (article 25 of the Commercial Code).
The effect of the protest is, for the personal creditors of the partners, that they can exercise their rights over the debtor’s social participation and for the creditors of the company, that the partners are jointly and severally liable for the social obligations (article 25 Code of Commerce and article 223 of the Commercial Code).
If, despite the existence of a cause for dissolution, no resolution is taken that allows the company to continue, any interested party may appear before a Judge of First Instance for Civil Matters, in a summary proceeding, in order to declare the dissolution, order the registration in the Commercial Registry and name the liquidator in default of the partners (article 25 Commercial Code).
The declaration of dissolution, if so agreed, must be published ex officio by the Commercial Registry, 3 times during a term of 15 days in the electronic gazette of the Commercial Registry. Within the month following the last publication, any interested party may sue for the cancellation of the registration of the dissolution, if there has been no legal cause to declare it (article 239 of the Commercial Code).
The administrators cannot start new operations after the agreement of total dissolution or the verification of a cause of total dissolution. If they contravene this prohibition, the administrators are jointly and severally liable for the operations undertaken (article 240 of the Commercial Code).