The battery of anti-crisis measures approved by the Government is corrected and expanded. The eventual breach in the last line of the income statement for this year that reduces the net worth below half of the share capital will not imply that it has to go into dissolution, as published yesterday by the BOE. Thus, companies will be able to charge themselves with red numbers when computing extra provisions of all kinds and postpone eventual capital reductions or increases until next year.
Spanish company law is unequivocal. When a company has reduced its own funds – which are essentially made up of capital, reserves and results, whether they are losses or profits – below half of its share capital, the company must be dissolved.
The Government opens the door to include extra provisions in 2021
The law leaves the door open for losses that reduce equity to be offset by capital, as Deoleo did, for example, in 2019. Or for shareholders to inject fresh money to balance the situation. That strategy was the one Dia followed that same year with a capital increase of 605 million. The combination of both formulas, which involves reducing capital and then injecting new cash so that the company has gasoline to operate, is known in slang as an accordion operation.
The owner of the Carbonell or Koipe oil brands did just that last year, reducing share capital to zero and subsequently increasing it by 50 million. He needed fresh money to start his business plan. On the other hand, the supermarket chain that Letterone controls made use of the weapon that the Government granted it in September last year, in the image and likeness of the one approved for this year, but only for the losses of 2020.
At the end of 2020, Dia registered a negative net worth of 41.9 million in the individual company, so that it could endure without increasing capital until this year at 1,028 million.
Shield until 2022
The anti-settlement shield is now accumulated for the 2020 accounts and for the current fiscal year. Losses from any of these years will be taken into account when approving a possible liquidation. Until the Government deployed its first anti-Covid shield for this issue in September 2020, in the event that the net worth fell below half of the share capital, the company had to convene a meeting within a maximum period of two months to approve its liquidation or remedy the situation with any of the aforementioned formulas.
The experts consulted point out that companies, especially those that do not have to give explanations to investors, will be able to inflate their losses this year through provisions. They will be able to do this without having to carry out any restructuring of their short-term balance sheet.
The measure of grace, in any case, does not have permanent effects. The losses of 2020 and 2021 that have cut the company’s net worth until it is on the verge of dissolution will have consequences on the result of 2022.