France: New regulations regarding net equity requirements for companies whose net equity is less than half of the share capital

published on 5 October 2023 | reading time approx. 2 minutes

French law was particularly severe with companies that had incurred losses and whose net equity was less than half of their share capital. Failing regularization (either by offsetting the losses against profits or by reducing the capital) by the end of the second financial year following the financial year in which the losses were recorded, these companies had to face the risk of an interested third party petitioning for their dissolution in court.

This binary choice provided by French law (recovery or dissolution) was unusual at the European level and was considered to be incompatible with EU law. For example, under German law, a company is not obliged to reconstitute its equity capital, but rather to monitor its level of indebtedness and its ability to continue as a going concern.

In March of this year, these French regulations were reformed by article 14 of the Law on the Adaptation of Various Provisions to the Law of the European Union in the Economic, Health, Labor, Transport and Agricultural Fields ("DADUE"), which introduced a new possibility for regularization and extended the period after which there is a risk of forced dissolution^[1]. The procedure is now as follows:

1. within four months following the recording of the losses leading to the loss of more than half of the share capital: the company must decide on its dissolution or continuation (unchanged);
   
2. until the closing of the second financial year following that in which the losses were recorded: the company is required to restore its shareholders' net equity or reduce its share capital by the amount necessary to bring the value of its shareholders' net equity to at least half of its share capital; then
3. failing regularization at the end of this first two-year period: the risk of compulsory liquidation is avoided if, within a further two-year period, the company has reduced its share capital below a threshold established by decree.

However, in the absence of a decree establishing the thresholds, these new rules were not applicable. This is now the case with Decree No. 2023-657 of 25 July 2023, which establishes the thresholds as follows^[2]:

• 1 percent of the company's balance sheet total at the last balance sheet date; or
  
• if higher, the value of the minimum capital for the type of company concerned (i.e. 37,000 euros for SAs and SCAs)
  

The application of the new regulations is summarized in the following chart:

Please click on the graphic to enlarge

The particularly low thresholds are intended to give third parties an idea of the company's actual financial situation. Only those companies which have not complied with the procedure prescribed by the new regulations (in particular, which have not reduced their share capital below the threshold after the expiry of the four-year period) are faced with the risk of dissolution.