Which Challenges May Arise in the Process of Reducing a Reserve Capital

The process of reducing a reserve capital, on the one hand, isn't difficult to carry out (as opposed to dissolution procedure, for instance). On the other hand, it comes with a whole host of stumbling blocks that may render the procedure much more difficult than it needs to be.

In which types of situations might a reserve capital need to be reduced?

Shareholders of an LLC hold the right to reduce a reserve capital. In fact, under particular circumstances, they are actually be obliged to, for instance when:

• the current cost of a share needs to be paid out but there is not enough difference between the net assets and the reserve capital in order to pay it.
• the shareholders have not assigned or sold a share in the reserve capital that has been on the company's balance for a year;
• following the conclusion of the financial year, the value of the net assets turns out to be less than the reserve capital (keep in mind that back at the end of 2023, this was not required due to the provisions of Federal law #519-FZ passed on 12/19/2022).

How does one go about reducing a reserve capital?

There are two ways:

• reducing the nominal value of the shares whereby the amount of the shareholders’ shares must remain the same;
• paying off debts belonging to the LLC. In this case, the amounts of the participants’ shares will have to be enlarged, but the nominal value of the shares will remain unchanged.

What trouble may one encounter in reducing a reserve capital?

As in the case of addressing any important issues within an LLC, first off, a general shareholders meeting must be called. If only one sole shareholder exists, none will be necessary.

Here is the sequence of steps for holding the meeting:

• notifying all the participants of the meeting and setting a date for it;
• studying the articles of association to figure which votes share will be requires to settle this agenda issue of reducing the reserve capital. By default, it’s at least a two-thirds vote, but it may also be unanimous. It all depends on how the person who wrote up the articles of association wrote out this requirement.

During the meeting, it’s important not to forget to notarize the event of the resolution’s adoption. Alternative options for certifying such resolutions also exist. To do so requires first studying the section of the articles of association covering how meeting resolutions are to be certified.

Within three business days, the tax inspectorate must be informed of the passed resolution. It’s important that that deadline isn’t missed, otherwise one may face a 5,000-rouble fines under the AOC of the Russian Federation article 14.25 part 3. By that same deadline, a notification of the reduction of the reserve capital must be filed with “Fedresurs” (the Unified Federal Register of Information on the Facts of the Activities of Legal Entities, or the "UFRIFALE”)

After the corresponding record that the LLC is enacting a reduction in its reserve capital is entered into the USRLE, a publication must be submitted to the State Registration Bulletin. A month later, a publication must then be submitted once again.

Finally, another declaration of the reserve capital's reduction must be provided to the registration office. There is no precise timetable for that, as different specialists give different answers on it. Some say that it has to be done after the creditors announce their demands while others say it has to be done right after the second publication in the Bulletin is made. The timetable is not established by law: it mostly depends on whether the tax office employees decide to deny the submission.

Denials are always of course possible in the event that letter boxes aren't filled right or a comma is written in the wrong spot. Furthermore, before the procedure is initiated, they check whether there is any inaccurate information in the USRLE as well. That is, whether there is a note that no registration actions can be taken.

Need help reducing/enlarging your reserve capital? Get in touch with our corporate lawyers today and we will help you properly observe all the formalities!