Reserves are assets generated by the company itself, in principle, and which the members cannot (due to requirements in law or the articles of association) or do not want to share out.
There are various types of reserve:
Contractual or articles of association reserves
Are established at will by the members in the company’s articles of association or under the terms of a specific contract.
These reserves can be used for a variety of purposes. To modernise equipment, purchase premises, to be incorporated into the capital, for example.
If the clause in the memorandum and articles of association that gave rise to the reserve is amended, these reserves can be untied from their planned use and shared out amongst the members in the form of dividends.
Non-compulsory or free reserves
Members can decide to create certain reserves each year. These reserves originate from profits not shared out.
In general, only half of the profit available for sharing can be retained as a reserve.
Are legally mandatory, and determine that at the end of each fiscal year, a percentage, which shall not be less than the twentieth part of the company’s profits, is to be kept as a statutory reserve until the total amount in the reserve is equal to 20% of the share capital.
The purpose of these reserves is:
- To cover that part of the loss recorded in the balance sheet for the financial year which cannot be covered by the use of other reserves;
- To cover that part of the loss retained from the previous financial year and which cannot be covered by the profit in the financial year nor by the use of other reserves;
- Incorporation into the capital.
In the event of infringement of statutory reserve regulations:
If by resolution, legal provisions regarding the creation, reinforcement or use of statutory reserves are breeched, the resolution is deemed null and void.
The managers and directors promoting such resolutions may have civil liability proceedings instigated against them.
This is an indirect process of not sharing out profits, through the concealment of profits. It is implemented either by the understatement of assets or by the overstatement of liabilities.