Who is liable for overstating the value of an in-kind contribution?
The requirement that the share capital of a limited-liability company be fully covered prior to registration of the company is tied to liability in the event that an in-kind contribution is made to the company at an inflated value.
The Polish Commercial Companies Code (Art. 163(2)) requires that the share capital of a limited-liability company (sp. z o.o.) be fully covered before the company is entered in the commercial register. This applies to the initial registration of the company with the share capital set forth in the original articles of association, as well as registration of subsequent increases in the share capital of an existing company.
Proof of satisfaction of this requirement is signing by all members of the management board of a statement that the contributions to cover the share capital have been paid in full by all of the shareholders (Art. 167 §1(2) and Art. 262 §2(3)).
Submission of such a statement does not generally present any difficulties when the share capital is paid in cash (with the exception of cases in which amounts are paid into the company’s bank account in foreign currency). In-kind contributions can raise problems in this respect, however.
In such cases, the articles of association should specify in detail the subject of the in-kind contribution as well as the number and par value of the shares taken up in exchange for the contribution (Art. 158 §1). In light of the management board’s obligation to confirm the full coverage of the share capital before registration, it is clear that the value of an in-kind contribution must be at least as much as the par value of the shares taken up in exchange for the contribution (although the shares may be taken up using agio, i.e. at a price higher than the par value).
Market value of in-kind contribution
While understatement of the value of an in-kind contribution as compared to the par value of the shares does not invalidate the articles of association (or the increase in share capital, as the case may be), and has no effect on the company’s liability in the event of insolvency (resolution of a seven-judge panel of the Supreme Court of Poland of 7 April 1993, Case No. III CZP 23/93, published at OSNC 1993 No. 10 item 172), the code applies far-reaching consequences when the situation is reversed.
Art. 175 of the code provides that in the event of overstatement of the value of an in-kind contribution, the shareholder who made the contribution and the members of the management board who filed for registration (of the company or the increase in share capital, as the case may be) knowing of the overstatement are jointly and severally liable to the company.
Liability under Art. 175 arises when the overstatement of the value of an in-kind contribution is “significant.”
Overstatement of the value of an in-kind contribution should be understood to mean a situation in which a valuation for the contribution is accepted that exceeds its true value, and as a result the shareholder is assigned shares with an inappropriate par value. The valuation of the in-kind contribution should be based on the sale value, which is the price that could be obtained if it were sold on the date of conclusion or amendment of the articles of association, as the case may be (Supreme Administrative Court judgment of 8 April 2010, Case No. II FSK 1920/08).
Effect of encumbrances on the market value of an in-kind contribution
In a ruling by the Warsaw Court of Appeal in a case brought by a company against its sole shareholder and a member of the management board for payment of the difference between the declared value of an in-kind contribution by the shareholder and the actual value of the contribution (judgment of 13 September 2012, Case No. VI ACa 421/12), there were doubts concerning how to determine the sale value.
In that case, heard at the first instance by the Warsaw Regional Court (judgment of 14 September 2011, Case No. XX GC 446/09), the subject of the in-kind contribution was an organised part of an enterprise, a major element of which was real estate significantly encumbered by mortgages in favour of third parties.
The regional court held that such encumbrances on the asset do have an effect on the value of the in-kind contribution. Although the existence of mortgages does not affect the value of the real estate in the sense of the price, it nonetheless directly affects how the proceeds from sale of the property would be divided. Therefore, in the court’s view, encumbrances on the property contributed in kind are material for its sale value calculated as of the date of the company’s acquisition of the contribution. Consequently, in this case, the value of the in-kind contribution to the company was overstated by an amount equal to the encumbrances on the property.
It should be pointed out that when compared to the regulations concerning in-kind contributions to a joint-stock company (Art. 309 and 311–3121 of the Commercial Companies Code), which require an audit of the fair market value of in-kind contributions, the regulations concerning limited-liability companies are not particularly formalised. On the other hand, a consequence of the informality in this respect is the risk of liability on the part of the shareholder making the contribution or the members of the management board certifying the adequate value of the contribution.
Therefore it is crucial in the case of in-kind contribution toward the share capital to examine the subject of the in-kind contribution carefully to assure that the value adopted for the contribution reflects its sale value.
Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners