Definition of Operation Accordion
When a company has suffered losses in its income statement, and its net worth has fallen below the legally required minimum, the company enters into a situation of mandatory dissolution. In order not to dissolve the company and to be able to clean up the accounts, one option that the company has is to carry out the so-called ‘accordion operation’.
It is a special corporate operation, which consists of a simultaneous reduction and increase of capital, in order to financially reorganize a company. It implies that the company reduces its share capital to compensate for its indebtedness and clean up its balance sheet and immediately carries out a capital increase to raise new resources and continue its activity.
Both processes must be carried out simultaneously, the share capital is reduced to zero and the capital increase is immediately carried out. In cases where the new capital is equal to or greater than what was previously there, this difference works in favor of the creditors, so they should not oppose the operation.
It is not mandatory to reach the pre-reduction volume. These operations are usually linked to a new project, so that, after adjusting the share capital figure to the recorded losses, it is expected that new financial resources will be available as a result of the increase.
When is it mandatory to restore balance?
1) When the Shareholders’ Equity is less than half of the share capital.
Example:
A company that has a share capital of 30,000 euros, but the accumulated losses have reduced the Net Assets to 12,000 euros, that is, below 15,000 euros, a figure that corresponds to 50% of its share capital
In this case, the equity balance must be restored immediately or the company dissolved.
2) When the Net Assets of a corporation is between half and two thirds of the share capital. Example:
The company in the previous example, with a share capital of 30,000 euros, but in this case its Net Worth is 18,000 euros. In this case, the Equity is greater than half of the share capital (15,000 euros), but less than two thirds (20,000 euros.
The company can continue its activity for one more year until it manages to overcome the situation. After that time without achieving it, you must restore the balance of assets.
Therefore, when the Net Worth of a limited company is above half of its share capital, it will not have to be dissolved. Nor when the Net Worth of a corporation is greater than 2/3 of the share capital.
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