In the midst of negotiations with investors, a long-standing client approached us with a specific case: a significant sum contributed by a shareholder some time ago was recorded on the balance sheet as a company liability. The question arose – should it remain classified as debt, or should it become part of the company’s registered capital so that the financial statements reflect the real capitalization?
The background to this case goes back several years. During the execution of a key project, the company suddenly faced the urgent need for liquidity – to pay suppliers, order equipment, and cover expenses that could not be postponed. One of the shareholders reacted quickly and provided financing in the form of an additional cash contribution. The project continued as planned, and operations were not interrupted.
Today, however, circumstances are different – the company is at a stage where formal capital indicators are crucial for future transactions and financing. In such situations, converting additional cash contributions into capital proves to be a strategic move, one that optimizes the balance sheet and sends a clear signal of stability and long-term commitment to the business.
When is this approach appropriate?
The need to transform an additional cash contribution under Art. 134 of the Bulgarian Commercial Act into capital most often arises in the following cases:
- attracting a new investor, where it is important for the balance sheet to reflect the actual size of equity;
- restructuring of financing to reduce indebtedness;
- reinforcing the long-term commitment of a partner to the business;
- preparing to apply for bank or investment financing, where capitalization indicators are key.
How does the procedure work?
The procedure is formal and follows two main directions – on the one hand, the appointment of experts to prepare an independent valuation of the receivable, and on the other, registration of the capital increase with the Commercial Register. At each stage, the law provides for specific deadlines, formal requirements, and documents that must be complied with.
The transformation of additional cash contributions into capital takes place through a capital increase by way of an in-kind contribution, the subject of which is the receivable of the partner arising from the additional cash contributions made.
The process usually unfolds in the following steps:
1. Collecting information and documents
The first step is to determine the exact amount of the receivable and the grounds on which it arose. This includes resolutions of the sole owner/shareholders’ meeting approving the contributions, accounting records, payment orders, chronological listings of transactions, and bank documentation. At this stage, discrepancies between accounting data and available resolutions are often identified. Resolving these inconsistencies early is key to a successful procedure.
2. Request for appointment of experts
Since the contribution is in-kind, the law requires it to be valued by independent experts listed with the Registry Agency. The request for appointment must include details of the company, the subject of the valuation, and any proposed experts (if there are preferences).
3. Determination and payment of the expert deposit
The Registry Agency then determines the deposit amount to be paid by the initiator of the procedure. The usual range is between BGN 500–800 per expert, payable into a special account of the Commercial Register. The payment must be made within the specified period and recorded by the applicant under the “Appointments” section of the company’s file; otherwise, the procedure is suspended.
4. Preparation of the valuation report
After appointment and payment of the deposit, the experts have a deadline set by the Agency (typically 14 days) to carry out the valuation. The report must include detailed reasoning, the valuation methodology, and a conclusion on the value of the receivable.
5. Resolution for capital increase
Based on the expert report, the shareholders’ meeting or sole owner adopts a resolution to increase the capital through an in-kind contribution, whereby the partner subscribes new shares corresponding to the assessed value. The resolution must be drawn up in the legally required form and include all mandatory particulars.
6. Registration with the Commercial Register
The procedure concludes with the filing of an application with the Commercial Register for registration of the capital increase. The application must be accompanied by the resolution, the valuation report, the updated articles of association, and other documents required by law.
This sequence of steps ensures that the conversion of additional cash contributions into capital is carried out lawfully and effectively, while at the same time strengthening the company’s financial position and improving its attractiveness to investors, banks, and business partners.
Тhe article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
