1. Preamble
Five days from now, it will be 81 years since the day the Edwardsville Intelligencer (a local newspaper from Edwardsville, Illinois) came out, on 19.7.1938, under the title “Corrigan Flies By The Seat Of His Pants”.
What had happened?
One of the few (at the time) aviators, Douglas Corrigan, had submitted a transatlantic flight plan from Brooklyn to Dublin. The flight plan was, probably fairly, rejected, since the bold aviator seemed that he did not have the proper navigational instruments. Later, a (more reasonable, as it seems) flight plan from Brooklyn to California was approved. The journey started smoothly and ended after 29 hours in Dublin(!). The bold pilot never admitted that he ignored the rejection of his flight plan: He claimed failure of the navigational instruments of his airplane.
The phrase “fly by the seat of your pants” has since then been used to describe an action fully realized by someone’s own means, initiative and perception, without any outside help: always attractive – often reckless!
Is this also true for investments? For business plans?
Each one of us, depending in its personality and business profile, has already given its answer.
But how do SAs respond? Is there a framework favoring the slightly more “reckless” investor?
2. Partial payment of the SA’s capital
The provision allowing the partial payment of an SA’s capital is not new. But with the recent legislation regarding SAs (Act 4548/18), this provision was reintroduced, considerably stricter.
What does a partial payment consist of and what comes with it?
Partial payment of the share capital at the stage of a company’s incorporation (as well as at any time a company’s share capital increases), is the payment of only a part (and not its entirety) of the par value of a share (article 21 §1). The liable shareholder takes on (along with the “facilitation” provided) the obligation to pay the rest of the share’s value in a future time – depending on what is prescribed in the statute of the company.
In case of issuing share titles that have not been fully paid, it is obligatory to write on their front side that they are partially paid as well as the terms under which their payment in full will take place (article 21 §7).
Partial payment is not allowed in two cases: when contribution of a shareholder is made in kind and when we are referring to listed companies (article 21 §2).
3. Why would we choose (or allow) partial payment of share capital?
It is a fact that the bigger the capital base of a company, the stronger the company. But it is not always a given that the shareholders have the capability (or prioritize) to immediately pay their share of the capital at the time of incorporation of the company (or at the time of an increase of its share capital). It is possible, in the context of a smaller business venture, to be hoping for the participation in the business venture of a capable “partner”, associate or executive, to the traits of whom we are counting on for the venture to succeed. Another possibility is that there is a specific person who we want as part of the original shareholding scheme or who we want to join in at the company at a later stage (at an increase of the company’s share capital) but they do not have (not only the capability but also) the means to justify the wealth needed to cover their share of the capital (e.g. it could be one of the family’s children, in a family business).
In all these cases (and not only them), partial payment of the share capital is the way to go.
It is important to emphasize that the partially payed shares offer their beneficiaries the same rights as the fully paid ones (among these rights are voting and receiving dividends).
4. Arrangements that must be made in case of apartial payment of share capital
When partial payment of the initial share capital or of the capital increased is decided (in the context of statutory provisions), the following are obligatory (article 21 §3):
(a) The deadline for the payment in full (of the outstanding amount) of the share’s par value cannot be set for more than 5 years.
(b) At least one quarter (1/4) of each share’s par value must be paid immediately (e.g. if a share’s par value is 10€, then the minimum amount that must be paid is 2,5€). In case the shares are issued above par, the amount that equals to the sum above the par value is paid in full at the time of the payment of the first installment for the shares (e.g. if the par value of a share is 10€ and the price they are issued at is 20€, the extra 10€ must be paid along with the first installment that has (probably) been agreed on beforehand, for the payment of the outstanding amount of the par value).
(c) The fully paid off part of the share capital cannot be, in any case, smaller than 25.000€.
(d) In cases when shares, not yet fully paid off, are transferred, the transferor is responsible for the consideration of the shares still owed to the company for two years following the registration of the transfer of the shares to the Shareholders Book.
5. Is it mandatory to pay the (partially payed) shares’ par value in full in one installment?
It can be provided in the company’s statute that the payment in full of the outstanding amount owed for the par value of the partially payed off shares will take place either at once or in more installments.
In cases when partial payments (traches) are made for the outstanding amount, these payments are “evenly spread” to all shares that have been obtained by the same person (article 21 §4). This means that the shareholder-debtor cannot just fully pay off some of their (partially payed for) shares.
6. What is the “cost” of not paying what is owed for the partially payed for shares?
If the liable shareholder fails to make any of the instalments for the payment of the remaining amount due for the shares, they will face (strict) -but necessary for the company- repercussions (article 21 §§5 & 6). In such a case, the company’s BoD will set a one-month deadline to the liable shareholder to fully pay off what they owe for the shares. At the same time, the BoD is required to let them know what the repercussions will be if the one-month deadline passes and the liable shareholder has not fully payed off the sum owed for the shares they hold.
What will the repercussions be? In case the deadline passes with no results, the company will cancel the partially payed for shares and it will keep all sums already payed by the liable shareholder (instalments, a possible above par value sum). At the same time, the company will issue as many new a shares as the ones it cancelled and it will offer them to the other shareholders (:preferential right). In case the existing shareholders do not exercise their right, the company then offers the shares to the public.
If the cancelled shares are restricted, or if offering the shares issued as a replacement to the public is (at part or in total) not fruitful, the company is obligated to decrease its capital (at its first general assembly) by the sum of the nominal value of the shares not sold.
It must be stressed that the shareholder who has not paid a sum for their shares within the deadlines set is still, in any case, liable for the sum they owe, as well as for the legal interest, which is piling on until the invalidation of the shares. Further penalties or other claims of the company against the person liable may be provided for the company’s statute or in the decision for the increase of the capital.
7. In conclusion
A possible partial payment of the share capital is a “rift” on the admission that the person participating in a company’s incorporation (or in a company’s capital increase) pays for their shares in full. The aforementioned provisions allow shareholders to decide on paying only for a fraction of the par value of some (or all) of their shares. It is a given, though, that if the obligations taken on by the liable shareholders are not met, there are serious repercussions: they will not only lose their shares, but also the sum they have already paid for the shares’. It is also possible, as mentioned above, that more sanctions or other claims by the company may be in place in case of such a violation.
Douglas Corrigan (aka «Wrong Way Corrigan») managed to successfully conclude, in 1938, on his own – without the proper navigational instruments the (transatlantic and amazing for its time) flight from Brooklyn to Berlin. The result not only vindicated him, but also gave him the opportunity to play himself in the 1938 movie: «The Flying Irishman».
That was because he managed to finish his journey. What if he had not?Much like that, if the shareholder relies on luck, good conditions and future proceeds to pay off what they owe for their (not fully payed-for) shares:If they manage to come through, as an outstanding achievement.If not? As a disaster.
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July, 14th, 2019).
