The assets of a limited liability company may be distributed to the shareholders by distributing profits (dividends) or by distributing assets from reserves of unrestricted equity. Furthermore, assets may be distributed to the shareholders by reducing the share capital of the company, by acquiring and redeeming treasury shares, or in connection with dissolution and deregistration of the company. Unless the company has some other purpose than generating profits for the shareholders (e.g. charity), other transactions that reduce the assets of the company or increase its liabilities without a sound business reason (corporate benefit) constitute unlawful distribution of assets.
Firstly, if the shareholders decide to distribute funds from the reserves of unrestricted equity (e.g. repayment of an investment), such distribution of assets must be carried out in accordance with the provisions and general principles of the Limited Liability Companies Act. The main rule dictates that distribution of assets should be carried out in proportion to share ownership, but the shareholders can deviate from this rule if they are unanimous. Moreover, the company’s articles of association may also set forth that different share classes carry different rights in terms of asset distribution. It should be noted, however, that if a company wants to repay an investment made to the reserves of unrestricted equity as an unmarked investment, such distribution of assets should be done pro rata to all shareholders. Now, one would assume that this is not the purpose of such repayment and therefore, the investor and the shareholders should pay attention to the matter already when making the investment in the first place. Luckily, however, such transaction can be carried out with a unanimous decision of all the shareholders, which may or may not be an easy task to accomplish, or by using contractual means.
The parties should also pay attention to related-party loans as such arrangements may fulfil the criteria of unlawful distribution of assets. Such loans should always have a business purpose (corporate benefit), in addition to which general principles of the Limited Liability Companies Act, such as purpose to generate profits to all the shareholders and equal treatment (no decision shall be made that would confer undue benefit to a shareholder at the expense of another shareholder) should be followed.
And lastly, assets received from a company in violation of the provisions of the Limited Liability Companies Act (or the articles of association) shall be refunded, if the recipient knew or should have known that the distribution was unlawful.
We recommend that you consult with a legal counsel or bookkeeper/accountant before distributing any assets. The tried-and-tested principle of “you should talk with your lawyer first” may save you a pretty penny in the long run – both in terms of money and time.
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