Although the so-called irrevocable capital contributions on account of future subscription of shares have a widespread use among Argentine corporate entities, there is a legal vacuum in the Argentine Companies Law regarding the treatment of such contributions. That is why, in recent times, certain authorities issued some rules which intend to give a frame of certainty to the performance and use of the irrevocable capital contributions, at least within the scope of their authority.
Throughout the lifetime of a company, with a fully subscribed and paid in capital stock, generally comes up the need of new contributions in order to comply with its corporate purpose or to perform new projects without committing themselves into loans. As a consequence of such need, from the day-to-day business and without any regulation under the Argentine Companies Law, emerged the figure of the irrevocable capital contribution on account of future subscription of shares, also called "non-capitalized contribution" or "advance capital on account of future subscription of shares".
These contributions constitute a payment in advance of shares to be issued and subscribed in the future, even when at the time of the payment there is no resolution from the proper body of the company resolving the increase of capital stock of the company and issuance of the correspondent shares. Although the natural destiny of the irrevocable capital contributions is the payment of the future shares, it is not unusual to have such contributions reimbursed to the contributors.
Why the use of irrevocable capital contributions has become so widespread?
In most cases, the irrevocable capital contributions are used when a company needs funds in order to make certain investments, or to compensate the losses and avoid the occurrence of the dissolution cause set forth by the Argentine Companies Law when the losses take up most of the capital stock. Likewise, these contributions are used when the company has a debt with one of its shareholders or a third party in order to eliminate such debt and make the company look more reliable and solvent.
Under Argentine Companies Law, the ordinary way to capitalize a company is by means of (i) an increase of capital stock, which is resolved by a shareholders’ meeting, (ii) the issuance and subscription of the shares or any other instrument representative of the capital stock of the corresponding type of company, and (iii) the effective entry of funds to the company. On the other hand, the irrevocable capital contributions are performed by the immediate and preliminary entry of funds to the company subject to a future increase of capital stock and issuance of shares to be subscribed.
In a nutshell, the advantage of the irrevocable capital contributions is that they function the other way round in comparison to the mechanism stated by the Argentine Companies Law, incorporating the funds to the company, in principle, in an easier and most cost effective way. However, the problem arises when these contributions enter into the company without any intention of being capitalized and remain in this endless limbo-state situation some times for several years. Moreover, in many cases these irrevocable capital contributions may mask what is really a loan, thus avoiding its accounting as a debt, the payment of applicable interests and resulting taxes.
Technical Resolution 17
In December 2000, the Argentine Association of Economic Science Professionals Bureaus (Federación Argentina de Consejos Profesionales de Ciencias Económicas) issued Technical Resolution 17 ("RT 17"), which established certain requirements for the contributions to comply with in order to be considered irrevocable capital contributions and, hence, be accounted as a credit in the financial statements of the companies. Here follows an overview of the requirements set forth by RT 17.
(i) Effective payment of the capital
RT 17 aims at basing the accounting of the contributions on an economic reality and not let them disguise other situations. In the first place, RT 17 requires that the contributions be "effectively paid in", that is to say that the money must enter the company someway and that such circumstance must be duly evidenced.
(ii) Agreement between the contributor and the company
In the second place, the contributor and the administrative body of the company must enter into an agreement including (i) the commitment of the contributor to maintain his contribution unless its reimbursement is resolved by the executive board of the company; (ii) the stipulation that the contribution is made on account of its future turn into shares and (iii) the conditions for such turn.
(iii) Approval of the company
RT 17 requires that the contributions be approved by the shareholders’ meeting (or equivalent body) or by the administrative body ad-referendum the shareholders’ meeting.
(iv) Reimbursement of the contribution
It is worth noticing that RT 17 also foresees the possibility that the irrevocable capital contribution is reimbursed to the contributor, and requires, in such case, the resolution of reimbursement by the shareholders’ meeting of the company through a procedure similar to the capital stock reduction procedure stated by the Argentine Companies Law. The question arises when distinguishing which steps of the capital stock reduction procedure apply and which not. Despite the legal vacuum, in any case it will be the auditors who will finally decide if the required procedure is complied with or not.
Although issued at the end of year 2000, RT 17 started to be applicable to the fiscal years beginning after July 1, 2002. Therefore, from that date on all irrevocable capital contributions which do not comply with the requirements set forth by RT 17 will be accounted as a debt.
Resolution of the Securities Exchange Commission
The Securities Exchange Commission (Comisión Nacional de Valores or CNV) also detected the lack of ruling regarding irrevocable capital contributions, which was not consistent with the reality of the Argentine companies, and hence issued, in June 2004, General Resolution 466/2004 ("GR 466"), which includes a number of requirements to be complied with for the contributions to be considered irrevocable capital contributions. Those requirements are consistent with the RT 17’s requirements and, what is more, GR 466 sets forth that all regulations included in RT 17 are complementary applicable.
Even though GR 466 only applies to public companies, it may serve as a guide to follow in closed companies as well. In addition, it is expected that other authorities (like the Public Registry of Commerce) focus their attention on this issue in the near future and, thus, regulate in a similar way the irrevocable capital contributions in closed companies. Here follows an overview of the requirements set forth by GR 466.
(i) Urgent situation
Amongst the requirements set forth by GR 466, one deserves special mention the obligation to evidence that the contributions obey to an urgent situation that does not allow the performance of the proper capital stock increase procedure. The assessment of what constitutes an "urgent situation" seems to be left at CNV’s discretion.
(ii) Effective payment of the capital
In addition, GR 466 also states that the contributions must have a "simultaneous balancing entry in the item Cash and Banks", that is to say, that its effective entry to the net worth of the company must be evidenced. In fact, this condition fully agrees with RT 17’s requirement that the contribution be effectively paid in.
(iii) Acceptance by the board of directors
Other specification stated by GR 466 is that the contributions will only be accounted in the net worth of the company as from their acceptance by the board of directors or applicable administrative body of the company. This condition, which implies that there must be a written acceptance of the contribution by the administrative body of the company, is also required by RT 17.
(iv) Accounting Specifications
Concerning accounting specifications, the resolution establishes that while being considered an irrevocable capital contribution the same will not accrue any interest and, in case the company resolves the reimbursement of such contribution, it will immediately integrate the debt account of the company. Furthermore, the resolution requires including notes in the financial statements of the company on the procedure’s status of the contribution.
(v) Shareholders’ meeting resolution
One of the most innovative issues of GR 466 is the requirement that the first shareholders’ meeting held after the irrevocable capital contribution was made must resolve the destiny of such contribution. What is more, such shareholders’ meeting must be held within 6 months as from the acceptance of the contribution by the administrative body of the company. Allegedly, this requirement would prevent the irrevocable capital contributions from remaining indefinitely in the net worth of the company without deciding if they would be capitalized or reimbursed.
(vi) Absorption of losses
Another key issue set forth by GR 466 is that when losses are covered with irrevocable capital contributions a procedure similar to the reduction of capital stock procedure stated by the Argentine Companies Law must be accomplished. Again, the question arises when distinguishing which of all the involved steps must be accomplished. Apparently, this distinction will be up to CNV’s criteria.
In any case, it may be constructed that a shareholders’ resolution will be necessary together with the publications in the Official Gazette and the period for the opposition of the creditors.
The need to fill in the legal vacuum with regard to the irrevocable capital contributions on account of future subscription of shares becomes obvious, above all, because they are usually used in an ambivalent manner. Hence, in order to protect all the interested parties, and for the sake of juridical safety, legal rules were needed.
The beginning of the path has been initiated by RT 17 and GR 466 in their respective application fields; however, it seems that corporate law should go further beyond and deepen such initiatives complementing the rules already issued for all companies doing business in the Republic of Argentina.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.