Contractual deduction between the company and its partner – cash contribution or aport?

In the process of increasing the share capital of capital companies in corporate practice, the often used procedure is the so-called conversion of receivables into share capital in the option of deducting debts of the shareholder from the company's claim. When a shareholder of a capital company is at the same time its creditor (e.g.

due to a loan granted to the company), and the company holds a monetary claim against the shareholder to pay the shares, then the mutual liability of the shareholder and the company is offset by cash covering the rights of the company.

The conversion shall take the form of a debt or debt conversion, depending on the category of entity participating.

From the perspective of the company, this will be the conversion of debt to share capital, and from the point of view of the shareholder, the conversion of claims held by the shareholder towards the company into shares in the same company.

The conversion in most cases involves an increase in the share capital of the company, resulting in the creation of new shares or shares, which, in return for the redemption of its debt, includes a shareholder (the creditor).

In general, the term ‘conversion’ of claims into share capital refers to two forms of capital increase:

• in exchange for a non-monetary contribution (port contribution), where the increase in share capital is made by the transfer to the company of claims of a shareholder held vis-à-vis the company in the form of an aport (non-monetary contribution).[1]
• in exchange for a cash contribution (non-port contribution), where the increase in share capital is by deducting mutual cash claims.

The transfer of debt to capital is undoubtedly beneficial for the company – by reducing its debt, the conversion improves the company's financial liquidity and consequently affects the valuation of its value. On the accounting side, there is a change on the liability side of the company – the shareholder’s claim towards the company is transferred from the liability category to the ‘own capital’ category with a share capital credit (or, in the event of an agio, share capital and reserves)[2].

The provisions of the Commercial Companies Code prohibit shareholders of capital companies from deducting their claims against the company with a claim on the company against the shareholder as a contribution due to the shares or shares.

At the same time, the provision allows a contractual deduction to be made and, as a result of the construction of the provision, a unilateral deduction made by the company itself. According to the content Article 14(4) k.s.h.

The shareholder and the shareholder may not deduct their claims on the capital company with the company's claim on the shareholder in respect of the contribution due to the shares or shares. This does not disable the contractual deduction.

This provision therefore prejudges that, in the event of an increase in the share capital of a capital company, we will be subject to a statutory deduction or sui generis a contractual deduction[3].

A unilateral deduction by a company (called a statutory deduction) is permissible under the conditions of the deduction described in Article 498(1) k.c.[4] In that case, the payment of the shares or shares shall be effected by a unilateral declaration of the company's will to set aside its claims for payment of the contribution due to cover the shares with the claim due to the company to the person who covered those shares.

It should be recalled that the deduction is a form of extinguishing existing claims leading to the remission of mutual debts and liabilities. However, this compensation does not lead to the implementation of mutual benefits but only to cross credit one claims on claims second, both receivables shall be decommitted to a lower amount.

The purpose of the regulation Article 14(4) k.s.h. is to safeguard the interest of the company by ensuring that shareholders contribute to the real (effective) nature and actual contribution to the company of the proposed contribution[5].

The function of the said provision is to prevent a shareholder from involving units in a capital company by making a commitment to cover them by means of a cash contribution and then making a statutory deduction of his claims on a company with a company’s claim on him.

The function of share capital is, in particular, to provide the company with the necessary assets to start or continue its business[6]. In view of the need to safeguard the interests of the company, Article 14(4) k.s.h.

the legislator introduced a subjective ban on unilateral deduction by denying the shareholder the possibility of making such a declaration, but leaving the parties the possibility of making a contractual deduction or unilateral deduction of claims by the company[7].

The deduction in the share capital increase process precedes a number of operations. It should be pointed out, first, that the increase in the share capital associated with the creation of new shares makes it necessary for the meeting of shareholders to adopt a resolution indicating how the newly created shares or shares are covered.

Where a shareholder is a creditor of a company whose share capital is to be increased (i), and undertakes to cover the newly held shares by a cash contribution (ii), then after carrying out activities related to the raising of capital (iii) such as the adoption of a resolution on the increase of share capital, the amendment of the company's contract, the submission of a declaration of accession to the company and the taking of shares, it is permissible for the company to make a statement of the deduction of the shareholder's claim against the company's liability for the contribution to the shares (statutory deduction) or the conclusion between the shareholder and the company of the mutual set-up agreement (contractual deduction).

Consequently, the company’s claim against the shareholder for its obligation to contribute a certain amount of money is deducted from the shareholder’s debt to the company in question (e.g. loan granted to the company).

Some commentators distinguish between the effects caused by the unilateral deduction by the company and the contractual deduction which the company and the partner make on the basis of consistent declarations of will.

The doctrine expressed doubts as to how a unilateral deduction by the company should be treated towards a shareholder, in accordance with Article 14(4) k.s.h.

Some of the representatives advocated such a deduction of the company to the shareholder in the category of non-monetary contributions (port) resulting in the company's claim being terminated and the company receiving the grant of which the equivalent results in a corresponding reduction in its liabilities.

After first, the nature of the contribution already prejudges the content of the resolution on the raising of share capital, as the resolution indicates how the newly created shares will be covered, subject to the express condition that a non-monetary contribution will be made to the company to cover them. Article 158(1) k.s.h.

reserves that if the contribution to the company to cover the share is to be either in whole or in part a non-monetary contribution (port), the articles of association should specify in detail the object of that contribution and the person contributing to the transfer, as well as the number and nominal value of the shares in return.

Thus, if an increase in the share capital of a company requires a change of its contract (most often also the establishment of its new single text), the content of the resolution on amending the company's contract requires a detailed description of the subject matter of that contribution.

This was confirmed by the Supreme Administrative Court in its judgment of 14 December 2004 reference no. FSK 1408/04 (LEX No.

147669), in which that court pointed out that whether the conversion of a shareholder’s claim to the company would take the form of a contribution of money or non-monetary share capital would determine the content of the resolution on the increase in share capital. After second, In Article 14(4) k.s.h.

The legislator refers to the concept of ‘share payments’, which in itself justifies the claim that it refers to monetary claims, as it indicates that the settlement of the coverage of units in the company will be made in money.

It will therefore be possible to deduct the shareholder's claims against the company with the company's claim on the contribution to the shares only if the shareholder has undertaken to contribute in cash to the company. There are no grounds to treat the contribution as an aport for this reason only because, instead of paying cash or bank money, the deduction of cash claims, acceptable in the light of both the Civil Code and the Commercial Companies Code.

In conclusion, the contractual deduction referred to in Article 14(4) k.s.h.

is a simplified way of making a monetary contribution in order to cover shares in the increased share capital, and the contractual deduction itself is tantamount to the implementation by the shareholder of the obligation to make a monetary contribution to the company.

It does not matter that the payment of the shares is not made by the payment of money (cash) or by the transfer of bank funds to the company. In my opinion, the key aspect is the change on the side of the company's liabilities – it causes not only a reduction in the company's liabilities but also an increase in its equity.

Finally, it should be pointed out that determining whether a financial or non-monetary contribution will have significant effects under tax rules.

Written by Olga Skonieczna

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