In a previous article we focused with the share capital of the SA. We dealt, among other things, with the meaning and importance of its payment. As we identified there, the capital both during the establishment of the SA and in the context of its increase process, is not required to be paid up in full. It is expressly and clearly stated by law that its partial payment is permissible. The partial payment, however, requires specific procedural steps, presents advantages and risks. About them, see immediately below.
The advantages and the risks
The possibility of partial payment of the share capital has significant advantages. It allows, among other things, the accumulation – even in the future – of higher sums of capital (than those which, in a different case, could be collected and paid in full from the beginning). It binds the participants (shareholders) to a specific mix of equity composition – despite the fact that the funds will not, at the time of the (co)decision, be fully available. It facilitates (but also binds) those shareholders who make the partial payment to make up the missing amount. It binds the shareholders who fully paid up their share to the participation of the shareholders who partially paid their share in the share capital at a certain percentage. It facilitates tax planning and the justification of wealth (“πόθεν έσχες”). It saves costs for the business that any process of increasing the share capital entails.
This possibility, however, also holds risks for the SA, its shareholders and creditors. These risks concern the potential inability of the partially paying shareholders to make the full payment. For this reason, Law 4548/2018 provides, through provisions of mandatory nature, strict procedural conditions; stricter, however, are the consequences provided for shareholders who do not make (timely) payment.
The Concept Of Partial Payment
As a partial payment by law (Article 21 §1) “… is considered the payment at the establishment of the company, as well as the payment at each increase of its capital, of part of the nominal value of the share, with simultaneous assumption of the obligation to pay the remaining value of the share, in accordance with the provisions of the articles of association”.
However, it is noted that the repayment of the due value of the share can also take place by netting.
Conditions for Permissible Partial Payment
As we have already mentioned, partial payment entails risks. In order to minimize it, the legislator provides specific conditions in order for partial payment to be accepted as valid. These conditions aim, among other things, at the transparency of the partial payment process, at ensuring the payment of the share capital and at protecting the SA, the other shareholders – and of course third parties.
Statutory Provision
A necessary condition, on which the valid start of the partial payment procedure exclusively depends, is the relevant provision being in the statute of the SA (article 21 §1 in fine). The more specific terms will be provided, as the case may be, either in the statute itself and/or in the decision for the increase of the share capital with its partial payment (by the body that decides on the increase: General Assembly or Board of Directors).
Contribution In Money vs Contribution In Kind
Partial payment can only be provided for monetary contributions. It is not possible to adopt this specific procedure in the case of contributions in kind (art. 21§2).
The law’s prohibition seems perfectly reasonable. The agreed contribution in kind will not, as a rule, be possible to be paid in installments (transfer of, e.g., property ownership). It should be noted, however, that a necessary condition for the validity of the payment of the contribution in kind is its previous valuation (subject to the exceptions of Article 18 of Law 4548/2018). The valuation, however, is valid for 6 months (Article 17 §9). This time limitation cannot serve the partial payment of the capital as the latter extends, as a rule, over a longer period of time.
SA With Shares Not Listed on a Regulated Market
Only SAs with their shares not listed on a regulated market can be subject to partial payment of their shares (Article 21 §2). This prohibition is rightly intended to protect the capital market on the one hand and investors on the other: we have already mentioned the risks that partial payment entails.
Time During Which A Share Can Be Partially Paid
The special arrangements that apply mandatorily if the partial payment procedure is provided for include the maximum credit period for the payment of the installment or installments to repay the shares. Specifically: “The time during which the share value may remain only partially paid cannot exceed five (5) years” (article 21 §3, para. a’). The starting point of the five-year period must be considered: (a) Regarding the initial capital: the registration of the establishment of the SA in the Business Registry (b) Regarding cases of increase: the taking of the relevant decision by the competent body.
Therefore: the due date of the individual installments cannot be determined later than five years.
The Minimum Immediately Payable Portion of the Value of Each Share
Furthermore, the law specifies the minimum immediately payable portion of the value of each share, which is mandatorily and immediately payable without credit. That is, within the deadlines for full payment, as provided for in Article 20 of Law 4548/2018. In particular, this part (minimum-immediately payable) “…cannot be lower than 1/4 of the nominal value of each unpaid share”. At the same time, the immediately payable part of the share cannot be less than the minimum, according to the law, nominal value of the share, i.e. 0,04€ (Article 35 §1)
It is also clarified that in the event that shares are to be issued at a premium, “…the difference is paid in full, along with the payment of the first installment.” (article 21 §3, para. b΄).
The Minimum Immediately Payable Portion of the Share Capital
In addition, in the case of partial payment, the directly paid part of the capital, either during the formation of the SA or during its increase “…must be at least equal to the minimum limit defined in paragraph 2 of article 15” (article 21 §3, para. c).
Therefore: the sum of the individual, partial payments cannot fall short of the minimum, by law, limit of the share capital (€25,000).
Issued Securities
In the event that “…share securities are issued that have not been fully paid up, the fact of the incomplete payment and the terms of the latter must be written on their front side” (Article 21 §7). This provision is, of course, intended to protect those who acquire the shares at a later time. Of course, the transferor of the specific, not fully paid-up, shares has a corresponding obligation to inform the acquirer for the share’s partial payment, otherwise there is an obligation to, at the least, compensate the latter.
Consequences of Partial Payment
As long as the above conditions are met and while the partial payment process lasts, the following applies:
Shareholder Status
Shareholder status is already acquired from the time of coverage of the shares (in other words: the conclusion of the contract to undertake them). This, in practice, means that any partial payment does not deprive the respective shareholder of any of the rights deriving from their shareholding status. It is pointed out, however, that for the calculation of the quorum at the General Assemblies, the law takes into account the paid-up share capital only, article 130 of law 4548/2018).
Proration of Payments on Outstanding Shares
In case of partial payment, the imputation of the payments of the accrued installments and payments takes place in a specific way. In particular, in the event that the respective shareholder has taken over more than one share, the payment they make is proportionally attributed to each of these shares (Article 21 §4 Law 4548/2018). Practical: it is not possible to pay off some, only, of the total of the unpaid shares.
Full Liability for Transfer of Shares not paid for in full
In the context of the partial payment procedure, the law specifies the liability of the transferor of unpaid shares for the remaining, unpaid and due, sum: “the transferor of a share not paid in full remains liable for the due part of the share for a period of two years from the registration of the transfer…in the shareholders’ book of the company.” (article 20 §3, par. d’).
Therefore: Responsibility for the remaining-due part of the value of the share falls on the one who transfers; however, it also falls on the one who acquires as the latter (: acquirer) enters into the shareholding relationship. The relative liability of both (the transferor and the acquirer) is considered joint liability.
The Legal Consequences of Non-Payment (On Time).
The legal consequences for not paying an installment on time are, undoubtedly, severe (Article 21 §§5 & 6).
Through these and the proportional imputation of payments, which we examined above, it is sought to compel the shareholder to fulfill their obligations regarding the unpaid shares.
It is pointed out that the above provisions related to the consequences are applied proportionally in every case of late payment. Whether it is contributions in money or in kind (Article 20 §9).
The specific legal consequences are, in particular, the following:
Social Consequences
Σωματειακού Χαρακτήρα Συνέπειες
(a) In any case of late payment of any installment, the Board of Directors gives the shareholder a deadline of one month, with the following warning: “…in the event that this deadline has not been fulfilled, the unpaid shares will be canceled and any payments made will remain with the company as a penalty.”.
The above deadline is inflexible and must be communicated (together with the relevant warning) by any suitable means to the shareholders who have not paid the due installment. It is even recommended, for evidentiary reasons, to keep a formal document (e.g. an extrajudicial letter or even an e-mail). However, it is noted that the imposition of the specific deadline cannot be omitted.
(b) If the monthly deadline passes, the company takes the following actions:
(i) It notifies the non-paying shareholder that it cancels their shares and withholds in favor of it (the company) any advances or installments paid, including any premium difference. The cancellation, in this case, does not constitute a reduction of the SA’s capital, but a termination of the non-paying shareholder’s shareholding relationship with the latter.
(ii) It issues new shares, equal in number to those canceled and offers them to the other shareholders. If none of them buys them, they are freely available. Therefore, prior recourse to the right of pre-emption is necessary (: article 26).
(c) Furthermore, the law provides that: “…if the shares are restricted or if their offer is wholly or partially unsuccessful, the company is obliged to reduce the capital by the amount of the nominal value of the unsold shares in the first General Assembly to be convened, even if the relevant issue is not listed on the agenda”. The specific decision of the General Assembly to reduce the share capital is taken, exceptionally, by simple quorum and majority.
Consequences according to the Law of Obligations
A legal consequence deriving from the Law of Obligations (:§6), is the interest on the debt of the untimely paid contribution, with the legal interest rate, until the cancellation of the shares. Furthermore, in the articles of association of the SA or in the decision on the possible increase of the share capital with its partial payment, it is possible to provide for the forfeiture of further penal clauses, in the cases of late payment. Finally, the law does not exclude the possibility of the raise of other, additional, claims by the SA against the defaulting shareholders.
Alternative Legal Consequences
In addition to the consequences mentioned immediately above (§§5 and 6), the Recitals of Law 4548/2018 on Article 21 provides for the following consequence (among others). The possibility, i.e., of recourse to the provisions “…for the exemption of shareholders from the obligation to pay paid and unpaid capital through reduction or depreciation of the capital” (articles 30 §4, 32 §3).
The rule is the full payment of the share capital, which each shareholder undertakes to cover. An exception is, under certain conditions, its partial payment. The relevant conditions are, justifiably, extremely strict. They intend to protect, in advance, the legal entity and the third parties who look to the share capital of the SA. In case of violation of the specific conditions, the liable shareholder will lose their (partially paid) shares. However, their damages are not limited to the loss of their specific (often of significant value) assets. It also extends to the total of the money they paid for their (incomplete) repayment. However, as mentioned above, further penalty clauses and/or other claims of the company against the obligor may be in place.
In other words: the possibility of partial payment of the share capital constitutes a significant opportunity for the shareholder to whom it is granted, but it also entails significant risks. In this regard, special attention is required to be paid to the terms set in the articles of association as well as in the decision to increase the share capital.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 27th, 2022).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.