Loss of Half the Share Capital: The Mandatory Procedure

When a French company's accounts show that its net equity (capitaux propres) has fallen below half its share capital because of accumulated losses, the law imposes a mandatory procedure. It is not optional and it is not a formality: the managers must consult the shareholders on whether to dissolve the company, publish the outcome, and - if the company continues - restore the position within a set time. Failing to run the consultation exposes the company to a court-ordered dissolution at the request of any interested party. A reform of 9 March 2023 softened the sanction and added a new phase, so the modern procedure has three steps. It applies to the SARL (and, in similar terms, to other capital companies), and it is one of the most common company-law obligations that a French business will face after a difficult year. This guide sets out what "loss of half the capital" means, the four-month consultation, the publication, the two-year window to put things right, and what happens if the company does nothing.

When the procedure is triggered

The procedure bites when, as a result of losses recorded in the accounts, the company's net equity becomes lower than half the share capital. The test is a comparison of two figures at the close of the financial year in which the losses were booked: the net equity on one side, and half the nominal share capital on the other. It is the accounts that trigger it - the obligation arises once the meeting has approved the accounts revealing the loss, so it does not apply where the accounts have not been approved.

Getting the two figures right matters. Net equity is the algebraic sum of the contributions (capital and share premiums), revaluation differences, undistributed profits (reserves, credit carry-forward, the year's profit), losses (debit carry-forward, the year's loss), investment subsidies and regulated provisions. Some things are deliberately excluded: latent capital gains do not count unless the company carries out a free revaluation of its fixed assets, and the value of internally-created goodwill cannot be brought in. Participating loans, though treated as quasi-equity for financial analysis, remain debt in law and do not help. On the other side of the comparison, it is the nominal capital that is used, whether fully or only partly paid up.

This is where a low starting capital becomes a trap. A company set up with a token capital can find itself, in its first loss-making year, below the half-capital threshold and forced into this procedure before it is anywhere near insolvency - with a symbolic capital, the smallest loss can even tip it into cessation of payments. Choosing a realistic capital at incorporation is the simplest way to avoid meeting this procedure early. A slightly higher capital gives the company a cushion of net equity to absorb early losses before the half-capital line is ever crossed.

Step one: the four-month consultation

Once the accounts reveal the loss, the managers must consult the shareholders within four months of the approval of those accounts, to decide whether the company should be dissolved early. The shareholders vote on a resolution to dissolve - and they may adopt or reject it. Rejecting dissolution (that is, choosing to continue) is the common outcome, and it is a decision the shareholders are fully entitled to take.

The timing rule is strict. The four months run from the meeting that in fact approved the accounts showing the loss, and the deadline cannot be extended - unlike the six-month window for holding the annual accounts meeting, the law provides no extension here. The one relief comes later: if a dissolution is sought in court for breach of the procedure, the court can grant a period to regularise. But the consultation itself must happen inside the four months.

A decision to dissolve is an extraordinary decision, so it needs the majority required to amend the articles - three-quarters or two-thirds of the shares depending on the case - and can be taken in a meeting or, where the articles allow, by written consultation or a unanimous act. This has a striking consequence: a shareholder holding a little over the blocking minority (a little more than a quarter, or a third) can defeat a dissolution even where the majority manager wants it. And a vote taken as part of the dissolution question does not, by itself, amount to the shareholders' consent to contribute to the losses beyond their contributions - that requires an express or implied decision.

Two practical wrinkles are worth flagging. Because the four months run only from an approval of the accounts, the obligation to consult does not arise where the accounts have not been approved at all - though a company cannot use that to sidestep the rule indefinitely, and a court can intervene in case of fraud. And a company keen to move fast can decide on an early regularisation: it can convene an extraordinary meeting to increase the capital straight after the loss-revealing accounts, even within the four-month window. By voting the increase the shareholders show they want the business to continue - but the consultation on dissolution is still required given the gravity of the situation, and its outcome still has to be published. The same meeting can, if wished, examine the capital increase and the dissolution resolution together.

Publishing the decision

Whatever the shareholders decide - to dissolve or to continue - their decision must be published. The formalities are threefold: publication in a legal-announcements outlet in the department of the registered office, filing at the commercial-court registry, and entry in the trade and companies register. This publicity is part of the mandatory procedure, not an afterthought, and it is what puts third parties on notice that the company has crossed the half-capital line.

Two points on the publication are easy to get wrong. First, the decision must be published even if the situation was regularised before the shareholders met - the fact that the company has already restored its equity does not dispense with publishing the consultation's outcome. Second, once a decision not to dissolve has been entered in the register, there is no need to repeat the publicity every year while the equity remains below the threshold; the single publication of the continuation decision suffices until the position is restored.

Skipping the publication is a real risk, because it is the visible proof that the procedure was followed. A company that consults its shareholders but never publishes the result has not completed step one, and leaves itself exposed to the sanction that follows a failure to run the procedure properly.

The sanction for not consulting

The teeth of the procedure are in the sanction for skipping the consultation. Where the manager or the auditor fails to provoke a decision, or where the shareholders could not validly deliberate, any interested party can ask the commercial court to dissolve the company. This is the civil sanction that makes the four-month consultation genuinely mandatory rather than merely advisable.

"Any interested party" is read broadly. A creditor of the company can have sufficient interest to seek dissolution on this ground; so, courts have held, can a competitor; and a shareholder can act too, provided they show a legitimate, present and actual interest. The claimant does not need to serve a prior formal notice, but they do have to prove that the net equity is below half the capital.

The sanction is not automatic, and the company has two protections. The court can grant up to six months to regularise the situation, and it cannot pronounce dissolution if, by the day it rules on the merits, the position has been regularised. So even a company that missed the consultation can usually save itself by putting its equity right before the court decides. But relying on that is dangerous - the safe course is to run the consultation on time.

Step two: restoring the equity within two years

If dissolution is not pronounced and the company continues, it enters the second step: regularisation. By the close of the second financial year following the one in which the losses were recorded, the company must either restore its net equity to at least half the share capital, or reduce its capital by the amount needed to bring the equity back up to at least half of it. The two-year clock runs from the ordinary meeting that recorded the losses, not from the close of the loss-making year.

An example makes the timing concrete. If a loss arises in the year ended 31 December 2023, recorded by the accounts meeting held in the first half of 2024, the regularisation deadline is 31 December 2026, and the company's position is assessed at that date on its results and losses then. Regularisation can happen almost automatically: a run of profitable years can bring the accumulated losses back below the critical threshold without any formal operation. Notably, during the two-year reprieve the company must restore its equity but is not required to clear the losses themselves at this stage.

Where the market will not do the work, the company acts. It can hold an extraordinary meeting to increase the capital - but only with real new money or contributions in kind, since merely capitalising reserves already on the balance sheet changes nothing; a capital increase by set-off of liquid, due debts also works. Or it can reduce the capital to lift the ratio, often paired with a fresh increase (the "accordion"). The shareholders deciding on such an increase are entitled to the information they need to judge its merits, importance and usefulness against the company's prospects.

One point often missed is how later losses are treated. Once the shareholders have decided to continue without an immediate fix, there is no need to put the continue-or-dissolve question again if the company records further losses in the following year. But at the regularisation date those newer losses - the ones arising after the decision to continue - count alongside the older ones in judging whether equity has been restored to half the capital. So a company that keeps losing money after the continuation vote does not escape the arithmetic; it is merely not obliged to repeat the consultation. And if, in light of the facts, continuation looks hopeless, nothing stops the shareholders deciding on an early dissolution after all.

The 2023 reform and the new step three

The reform of 9 March 2023 changed the stakes of the second step in the company's favour. Since that reform, a company that fails to regularise within the two years no longer risks judicial dissolution for that failure alone. This is a significant softening: missing the restoration deadline is no longer, in itself, a ground on which any interested party can have the company wound up.

In its place the reform introduced a third step for companies whose capital exceeds a regulatory threshold. If the situation has not been regularised within the two years, and the company's capital is above that threshold, the company must reduce its capital to a value at or below the threshold within a further two years. The threshold is expressed as a proportion of the balance-sheet total. It is only if the company fails this step-three reduction - after roughly four years in total - that any interested party can again seek a judicial dissolution.

So the modern sanction map is this: dissolution remains available for a failure to consult the shareholders in step one, and for a failure to carry out the step-three capital reduction where the capital is above the threshold; but it is no longer available merely because the company did not restore its equity within the first two years. Where dissolution is sought in court, the six-month grace period to regularise still applies. A separate consequence runs throughout: while equity is below the threshold, the company cannot make distributions to shareholders that would leave equity below capital plus non-distributable reserves.

The boundary with insolvency proceedings

This procedure is a company-law mechanism, distinct from insolvency. The loss-of-half-capital rules do not apply to a company under safeguard (sauvegarde) or in judicial reorganisation, or benefiting from a continuation plan - those situations are governed by their own regime. Where an administrator, during the observation period, plans a continuation involving a change of capital and the equity is below half the capital, the meeting is first asked to restore the equity to the level proposed, which cannot be less than half the capital.

It is important not to confuse the two thresholds. Losing half the capital is not the same as cessation of payments: a company can be below the half-capital line while perfectly able to pay its debts as they fall due, which is exactly why the procedure exists as an early-warning and shareholder-consultation mechanism rather than an insolvency filing. The two can coincide - a symbolic capital plus losses can mean both at once - but they are separate tests with separate consequences.

Loss of half the capital can also draw attention from outside. The registry may, on seeing the loss of more than half the capital (alongside signs like unfiled accounts or registered tax and social-security liens), convene the manager before the president of the commercial court to consider measures to put the situation right - the general prevention-of-difficulties power. Handling the half-capital procedure properly, and on time, is part of keeping the company out of that wider spotlight. Run the consultation on time, publish the outcome, and plan the regularisation, and the procedure becomes a manageable administrative formality rather than an existential threat.

A worked example of the timeline

The mechanics are easier to see on a concrete case. Take a SARL with a capital of €50,000 that closes its accounts on 31 December. The accounts for the year ended 31 December 2022 are approved by the ordinary meeting on 30 June 2023, and they show that net equity has fallen below half the capital - below €25,000. On 29 October 2023, an extraordinary collective decision rejects dissolution, so the company must restore its equity to at least half the capital before 31 December 2025 - the close of the second financial year after the losses were recorded.

Suppose that at the close of 2023 the company has capital of €50,000, carried-forward losses of €44,800 and therefore net equity of €5,200. Its position is then judged on its 2025 results. If the further losses expected on the 2025 accounts are below €5,200, the company can regularise by reducing its capital to a nominal amount, because the reduced capital brings the ratio back into line. If the 2025 accounts show a profit below €19,800, again a reduction to a nominal capital regularises the position; and if the profit is above €19,800, net equity climbs back above €25,000 and the company has regularised itself automatically.

But if the further losses are above €5,200 and the company does not dissolve, a reduction alone is not enough - it must increase its capital by at least the amount of the losses. The example shows why the choice of remedy depends entirely on where the numbers land at the second-year close, and why the position has to be modelled against the deadline rather than guessed at. Under the 2023 reform, missing the restoration no longer means dissolution, but the step-three reduction may then come into play if the capital is above the threshold.

Getting the net-equity calculation right

Because everything turns on whether net equity is below half the capital, the calculation deserves care, and several items are easy to misjudge. Regulated depreciation (amortissements dérogatoires) is included, which raises the net equity of some companies - but only genuinely derogatory depreciation, applied under tax rules and not reflecting a real impairment; other depreciation cannot be swept in without distorting the figure. Getting this wrong in either direction can flip a company across the threshold.

Latent capital gains are excluded from net equity, unless the company performs a free revaluation of all its tangible and financial fixed assets - and even then, the value of a business's internally-created goodwill cannot be counted. Participating loans illustrate the gap between finance and law: they are treated as quasi-equity for financial analysis and help a company obtain bank credit, but their legal nature is a loan, so they are debt for this test and do not lift net equity. A company hoping a participating loan will keep it above the line will be disappointed.

On the other side of the comparison, the figure to use is the nominal capital, whether fully or partly paid up, taken at the close of the loss-making year for the consultation stage. At the later regularisation stage, the capital to compare is the old capital if it has not been changed since the continuation decision, or the new capital if it has. These are technical points, but they decide whether the four-month clock has started at all - which is why confirming the figures is the first step in any half-capital matter, before a single meeting is convened.

Frequently asked questions about losing half the share capital

This article states general principles of French law as at its date of publication and is provided for information only. It does not constitute legal or tax advice and creates no lawyer-client relationship. Thresholds and time limits evolve, and the 2023 reform is recent; verify the current texts before acting, and take advice on your specific situation.