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Belarus: changes to the law on commercial companies

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Maksim Salahub
Sorainen, Belarus
maksim.salahub@sorainen.com

Aliaksei Vashkevich
Sorainen, Belarus
aliaksei.vashkevich@sorainen.com

Anastasiya Smirnova
Sorainen, Belarus
anastasiya.smirnova@sorainen.com

 

On 28 April 2021, a set of amendments to the Belarusian law ‘On Commercial Companies’ will enter into force and introduce a significant number of changes concerning various aspects of corporate law. Some of the most notable changes are additional net assets maintenance requirements and explicit regulation of debt-equity conversions.

Net assets maintenance

Belarusian law currently contains a number of provisions related to the maintenance of a company’s net assets, including:

• an obligation to reduce a company’s share capital in the event it exceeds the company’s net assets upon results of the second or each subsequent financial year; and

• an obligation to liquidate a company in case its net assets become lower than the minimum statutory amount of the share capital (currently established only for joint-stock companies).

The upcoming amendments will explicitly state that the obligation to liquidate the company will also apply to the most widespread company form in Belarus – the limited liability company. According to the new rules, the limited liability company will be subject to liquidation if its net assets drop to zero or become negative.

In addition, the amendments will also clarify the term for making a corporate decision on reducing the share capital or liquidating the company, which in both cases will be six months following the end of the respective financial year.

Since the described changes introduce a more detailed regulation of the net assets maintenance requirements, state authorities will be more likely to proactively control compliance with the existing and new obligations, as well as impose liability for the discovered violations. As a result, the risks of forced share capital reduction or even liquidation of the company will become higher.

In order to eliminate the risks, companies will have six months following the end of the financial year in which the discrepancy between the share capital and net assets is discovered. During this period, the company will have to ensure that (1) its net assets value is positive (for limited and additional liability companies) or exceeds the minimum statutory amount of the share capital (for joint-stock companies); and (2) its share capital does not exceed the net assets value.

If the company’s net assets are negative or do not reach the statutory minimum, the company can remedy that in one of the following ways:

• increase the share capital by the amount ensuring compliance of the net assets value with the legal requirement, subsequently reducing the share capital so that it does not exceed the net assets value; or

• make an asset contribution to the company’s capital, not affecting the overall amount of the share capital and allocation of shares among the shareholders.

Prior to the recent amendments to the law, the first option was one of the main ways to deal with the issue of insufficient net assets, while the second one was not available at all. It therefore currently lacks tax regulation and accounting aspects in regards to its implementation. Due to this reason, it is likely that the option featuring the new asset contribution will not gain popularity until all the controversial issues are clarified by state authorities.

Meanwhile, companies will have to keep relying on the increase and subsequent reduction of the share capital, especially considering that the recent amendments have also regulated the debt-equity conversion ­– which in some cases may be a more preferable way to increase the share capital compared to the usual monetary or property contributions.

Debt-equity conversion

Until now the direct conversion of debt into company’s equity has not been legally possible for the majority of companies except for residents of the Hi-Tech Park – an area with a special legal and tax regime aimed at IT companies – who are allowed to conclude convertible loan agreements.

Instead, the ordinary companies not subject to special regulation had to undertake a cumbersome procedure of (1) increasing the share capital with a monetary contribution by the creditor, (2) ensuring actual transfer of the contribution to the company, and (3) using the received funds to repay the debt.

Due to the amendments to the law, companies will be able to avoid this procedure and directly convert the debt into equity by setting off the obligation to repay the debt against the obligation to make a contribution to the share capital. In this relation, the general requirements to perform the conversion will be:

• to make necessary corporate resolutions on the share capital increase and conversion of the debt;

• to ensure that the debt :

– relates to a monetary obligation; and

– has matured.

As a result, the new regulation of debt-equity conversions will make it much easier for companies to deal with corporate finance matters, from repayment of shareholder loans to structuring of investments.