Net Equity Below Half of Share Capital in French Companies: Legal Procedure and Remedies

When a French company's annual accounts show that its net equity — capitaux propres in French accounting terminology, meaning the aggregate of paid-up share capital, reserves, retained earnings, and the current year result — has fallen below half of its share capital (capital social, the nominal registered capital), the company does not dissolve automatically. It enters a mandatory legal procedure with firm deadlines, formal resolutions, and a two-year window to remedy the position.

This obligation is widely misunderstood by foreign directors and investors operating French subsidiaries. The issue is not purely accounting. Failing to convene the required extraordinary general meeting (AGE — assemblée générale extraordinaire) on time exposes the company to court-ordered dissolution at the request of any interested party, and the director to personal liability for mismanagement.

Direct answer: once approved accounts show net equity below half of share capital, the shareholders must meet in an EGM within 4 months of account approval to vote on early dissolution or continuation. If the company continues, it must restore net equity to at least half of share capital by the close of the second financial year following the year in which the loss was recorded.

The obligation applies to the main forms of French capital company.

For SARLs (limited liability companies, roughly equivalent to a private limited company) and EURLs (single-member SARLs), article L223-42 of the Code de commerce sets out the rule: if losses shown in the accounting documents cause net equity to fall below half of share capital, the shareholders must be consulted at an EGM within 4 months of the approval of the accounts that revealed the loss, to decide whether early dissolution is warranted.

For SAs (public limited companies), the equivalent rule is article L225-248 of the Code de commerce. For SASs (sociétés par actions simplifiées, a highly flexible form of joint-stock company widely used for startups and subsidiaries), article L227-1 explicitly refers back to article L225-248, making the same obligation applicable.

General partnerships (SNC) and limited partnerships (SCS) are not governed by these articles, though their articles of association may include equivalent provisions.

One point worth stressing: removing the minimum share capital requirement for SARLs (French law now allows a capital of 1 euro) did not remove this rule. Whatever the nominal value of the share capital, the net equity to share capital ratio continues to apply.

Net equity in French GAAP (plan comptable général) aggregates several balance sheet items:

• Paid-up share capital
• Share premiums (primes d'émission, de fusion, d'apport)
• Legal, statutory and discretionary reserves
• Retained earnings brought forward (report à nouveau), which may be negative
• Current year result (profit or loss)
• Regulated provisions and investment grants (depending on their accounting treatment)

A company can be growing its turnover and still cross the threshold if accumulated negative retained earnings and the current year loss wipe out most of its reserves. Reading revenue alone is not sufficient: the ratio must be calculated using the full equity section of the balance sheet.

The 4-month clock starts from the date of approval of the accounts that reveal the shortfall — not from the financial year-end. In practice, if a company approves its accounts for year N only in October of year N+1 (late approval is common in SMEs), the EGM must be held before February of year N+2.

The five-step sequence required by law:

1. Recording the loss: the annual accounts, once prepared, show net equity below half of share capital.
2. Convening the EGM: the manager (gérant) of a SARL or the president of a SAS convenes the extraordinary general meeting within 4 months of account approval.
3. Shareholders' decision: the EGM votes either for early dissolution (dissolution anticipée) or for continuation of the company. A formal minutes of resolution (procès-verbal) must be drawn up and signed.
4. Filing at the commercial court registry (RCS): the decision — whether dissolution or continuation — must be registered with the greffe du tribunal de commerce via the INPI single business window (guichet unique, inpi.fr). This step is not optional.
5. Remediation: if the company continues, it has until the close of the second financial year following the year in which the loss was recorded to bring net equity back up to at least half of share capital.

If no EGM is held within the legal deadline, or if the EGM cannot validly deliberate (quorum not reached, etc.), any interested party — a creditor, a shareholder, a supplier, the public prosecutor — may apply to the commercial court for compulsory dissolution. The court has discretion to grant an additional period for remediation, but this should never be treated as a fallback.

Consider a SARL incorporated with share capital of €100,000. At the close of financial year N, the balance sheet shows:

• Share capital: €100,000
• Reserves: €8,000
• Negative retained earnings (report à nouveau): -€45,000
• Loss for year N: -€28,000

Net equity = €100,000 + €8,000 - €45,000 - €28,000 = €35,000

The threshold is half the share capital: €50,000. At €35,000, the company is clearly below. The procedure under article L223-42 is triggered immediately on approval of the year-N accounts.

To comply, the company must bring net equity back to at least €50,000 before the close of year N+2. The gap to close is at least €15,000, though aiming for €55,000 to €60,000 provides a useful buffer if year N+1 is still slightly loss-making.

Practical options in this scenario:

• A shareholder waives €20,000 of a shareholder loan (abandon de compte courant), boosting net equity immediately via an exceptional income item.
• A profit of €18,000 in year N+1 would raise net equity to approximately €53,000 without any additional financial operation.
• If neither option suffices, a coup d'accordéon (capital reduction to absorb losses followed by a capital increase) resets the structure but requires a statutory auditor for the increase phase.

On abandon de compte courant: a shareholder waives their intercompany loan — in whole or in part — with or without a retour à meilleure fortune clause allowing repayment if the company's position later improves. The waiver is booked as exceptional income, improving net equity directly. The tax treatment at both company and shareholder level depends on the specific structure and must be reviewed case by case.

In our experience, companies that combine two levers — a partial loan waiver alongside a credible profitability target for year N+1 — present a more convincing recovery plan to banks than those relying on a single mechanism.

The absence of an EGM within the legal deadline creates concrete personal risks for the director:

• Any interested party may petition the commercial court for compulsory dissolution, without needing to demonstrate harm.
• The director may face civil liability for mismanagement if the failure to act demonstrably worsened the company's financial position.
• In insolvency proceedings, the absence of required governance steps may be cited as evidence of faute de gestion, potentially resulting in personal liability for the company's debts or a prohibition from managing companies.

Registering the EGM decision at the commercial court registry (RCS) is therefore both a legal obligation and a protective measure: it creates a public record that the company followed due process.

Banks and lenders will check whether the EGM was held, whether the decision was filed at the RCS, and whether the company has a quantified remediation plan for the remaining two financial years. A company presenting signed EGM minutes and a credible restoration plan is in a materially stronger position than one that has not addressed the issue.

The French tax authority may examine shareholder loan waivers, capital increases and restructuring operations during an audit. Timing and documentation of each act are critical — our article on anticipating a tax audit covers the standards we recommend.

Statutory auditors (commissaires aux comptes), where appointed, must flag the situation if the mandatory procedure has not been initiated, adding a further layer of urgency.

If remediation involves changing the company's legal form — for instance, converting a SARL into a SAS — the article L223-42 procedure must run alongside the transformation formalities. A change of form does not erase a net equity shortfall; it must be accompanied by simultaneous or prior recapitalisation to be effective. Where a holding company is involved, an intercompany loan waiver or merger may be considered — our articles on holding company tax structuring and contribution audits cover the key points.

• Calculate the net equity to share capital ratio as soon as accounts are prepared
• Identify the account approval date and count forward 4 months
• Convene the EGM within the deadline with an explicit agenda item on the equity shortfall
• Draft and sign the resolution minutes (procès-verbal)
• File the decision at the commercial court registry via the INPI guichet unique
• Formalise the remediation plan with figures and a timeline to the second year-end
• Verify the ratio at the close of the second financial year after the loss year
• Document every remediation step (waiver deed, capital increase act, etc.)

YMYL disclaimer: this article describes the general rules under the French Code de commerce (art. L223-42 and L225-248) as at the date shown below. It does not constitute personalised legal or tax advice. Each situation must be assessed against the company's articles of association, accounts, and specific timeline. Consult a qualified expert-comptable or a French lawyer before taking any decision. Current as at 29 May 2026. Sources: Légifrance — art. L223-42; Légifrance — art. L225-248; entreprendre.service-public.fr.