Conversion of receivables in exchange for shares

Pursuant to Article 158 of the Commercial Companies Code, a contribution to a company may be either monetary or non-monetary. Therefore, the shareholders have the freedom in the articles of association to decide whether and what kind of contributions may be made to the company. Importantly, the shareholders may entirely exclude the possibility of making non-monetary contributions, either by expressly regulating this in the articles of association or by remaining silent on the possibility of making such contributions. In the latter case, based on the wording of Article 158 § 1 of the Commercial Companies Code, it is assumed that non-monetary contributions are not permissible.

**Translation:**

A cash contribution does not pose any difficulties, as pursuant to Article 154 of the Commercial Companies Code, the share capital of a limited liability company must amount to at least PLN 5,000 and the nominal value of a share may not be lower than PLN 50. As regards a non-cash contribution, the articles of association should specify in detail the subject of such contribution and the identity of the shareholder making the contribution in kind, as well as the number and nominal value of the shares taken up in exchange.

It is also worth mentioning that it is possible to make a so-called “mixed” contribution, where a shareholder covers part of the share with a cash contribution and the remaining part with a non-cash contribution.

In the case of conversion of receivables, we are dealing with a non-cash contribution (although there are discrepancies in court rulings in this regard, in particular as to the tax consequences). In exchange for shares, the shareholder contributes to the company a receivable to which they are entitled. In such a case, two situations may be distinguished: first, where the shareholder contributes to the company a receivable they hold against a third party; and second, where the shareholder contributes to the company a receivable they hold against the company itself.

The Supreme Administrative Court (NSA), in its judgment of 13 September 2017, case file no. II FSK 2235/15, held that the conversion of a shareholder’s receivable against a capital company into shares (or stocks) in the increased share capital of the company that is the debtor of that receivable results in a non-cash contribution being made to that company. In turn, the Voivodship Administrative Court (WSA) in Warsaw, in its judgment of 29 March 2018, case file no. III SA/Wa 1693/17, stated that a non-cash contribution is any contribution that cannot be classified as monetary, i.e. one that does not take the form of specific monetary units and does not take the non-cash form of bank money. Therefore, if the increase in the share capital took place in such a way that the shareholder contributed claims against the company to cover shares in the increased share capital, the contribution was not of a monetary nature.

At the same time, due to the specific nature of this type of contribution, reference should be made, for example, to the judgment of the Supreme Administrative Court of 14 December 2004, case file no. FSK 1408/04, in which the Court held that whether the conversion of a shareholder’s receivable against the company into shares takes the form of a cash or non-cash contribution to the share capital is determined by the content of the resolution on the increase of the share capital.

In other words, the conversion of receivables is one of the possible ways of making a contribution to cover the share capital in a limited liability company. When considering making such a contribution, one should of course take into account the discrepancies in the case law; nevertheless, it is an attractive form of making a contribution to cover shares.