Reduction of Capital to Compensate for Losses

Reduction of Capital of Godo-Kaisha

In a Godo-Kaisha (limited liability company), the amount of stated capital can be reduced only in the following three cases.

(1) To compensate for losses
(2) For refund of capital contribution
(3) For refund of equity interest

Reduction of capital to compensate for losses

A Godo-Kaisha can eliminate a negative surplus (capital surplus + retained earnings) by reducing the amount of capital. Since this procedure only eliminates the negative amount, no refund to partners shall be made.

Maximum amount that can be reduced to compensate for losses

The lesser of the following:
(i) The negative portion of surplus (capital surplus + retained earnings) as of the date of capital reduction.
*The negative amount can be reduced to zero, but cannot be increased more than that.

(ii) Amount of capital on the date of reduction of capital
*The amount of capital cannot be reduced to a negative value.

Example:

Name	Capital	Capital Surplus	Retained Earnings	Total
A	3,000,000	3,000,000	-5,000,000	1,000,000
B	1,000,000	1,000,000	-1,000,000	1,000,000
Total	4,000,000	4,000,000	-6,000,000	2,000,000

In the above situation, (1) the amount of negative surplus is 2 million yen (4 million – 6 million = -2 million) ② The total amount of capital is 4 million yen. Therefore, the maximum number of capital that can be reduced is limited to 2 million yen. The result will be as follows.

Example:

	Capital	Capital Surplus	Retained Earnings	Total
A	1,000,000	5,000,000	-5,000,000	1,000,000
B	1,000,000	1,000,000	-1,000,000	1,000,000
Total	2,000,000	6,000,000	-6,000,000	2,000,000

* The amount of capital to be reduced from each partner can be determined by the consent of the relevant partner or by stipulating in the Articles of Incorporation. It does not necessarily have to be based on the percentage of capital contribution.

The amount of capital reduced in this way is once charged to capital surplus. As a result, the surplus (capital surplus + retained earnings) is reduced to zero, but this alone does not erase the negative retained earnings. A separate procedure is required to reduce capital surplus and transfer it to retained earnings. The result of the transfer is as follows.

Example:

Name	Capital	Capital Surplus	Retained Earnings	Total
A	2,000,000	0	0	2,000,000
B	1,000,000	0	0	1,000,000
Total	3,000,000	0	0	3,000,000

The negative balance of retained earnings is now eliminated.

As a result of the loss, the amount of each partner’s capital contribution (capital + capital surplus) will decrease. Therefore, each partner need to aware that the amount refundable under the “refund of capital contribution” procedure will be reduced.

In the above example: Originally, A could receive a refund of its investment of 6,000,000 yen, but after the loss is processed, the amount will be reduced to 2 million yen.

Specific Procedural Flow

(1) Decide the amount of capital (and capital surplus) reduction by a majority of the executive partners

(2) Creditor protection procedures (Important: It takes at least a month!)
– Application for and publication in the Kanpo (Official Gazette). A
– examples of the text are shown below.
– Individual notice to known creditors.

If the method of public notice is other than the Kanpo, there is a method to omit this process.

Unlike a Kabushiki-Kaisha (joint stock company), a Godo-Kaisha is not obligated to disclose its financial statements in the kanpo in advance.

Public notice of reduction in the amount of capital

The Company has decided to reduce the amount of capital by XX million yen. Creditors who have objections to this decision are requested to file their claims within one month from the day following the publication of this public notice.

Date:
　XXX Tokyo, Japan
　XXX Godo-Kaisha
　Representative Partner XXX

(3) Effective date

In the case of a Godo-Kaisha, the capital reduction takes effect on the date the creditor protection procedure above is completed.

(4) Rewriting of the chart of management of partners’ interests

It is understood that in the case of loss disposition, it is not necessary to take procedures to change the Articles of Incorporation regarding each partner’s investment (“name and address of each partner and the purpose of investment and its value”). As a result, the amount of capital contribution in the Articles of Incorporation and the amount of capital contribution (capital + capital surplus) in the control chart will be different. To avoid confusion later on, do not forget to update the management chart.

(5) Application for registration

When the amount of capital is reduced, an application for registration to that effect must be filed within two weeks of the effective date. In principle, the required documents are as follows. (If the method of public notice is the Kanpo)