Giving advances on profits in Macau

In Macau, Section 432-A authorises the distribution of advances on account of profits of the fiscal year provided that: (i) the articles of association establishes this possibility, (ii) the advance is proposed by the board of directors, (iii) a mid-term balance is elaborated, (iv) the mid-term balance demonstrates the existence, at the time of its elaboration, of amounts available for distribution, (v) the mid-term balance is certified by an auditor or an audit firm, (vi) the supervisory board or the sole supervisor expresses a favourable opinion, (vii) the amounts distributed as advances do not exceed half of the amounts available for distribution and, (viii) there is only one advance per fiscal year and only in the second half of the fiscal year. Companies generally face four common problems when proceeding with advances.

Competence

The first problem normally faced by companies is to know who is the corporate body competent to resolve the advance and if there are limitations to this competence.

Section 432-A follows the general rule that the corporate body competent to resolve matters regarding distribution of profits is the shareholders general meeting (Section 100 of the Commercial Code). However, the competence of the general meeting to resolve the distribution of advances on account of profits is subject to a proposal of the board of directors and previous approval by the supervisory board. This means the board of directors must, at their own discretion, propose to the shareholders the execution of an advance and terms of the same, together with the supervisory board or sole supervisor favourable opinion. The shareholders can either accept or reject the proposal, but not modify it.

Profits that can be advanced

The second problem companies face when resolving the distribution of advances is the meaning of profits. What can be considered as profits for the purposes of this Section?

Two simple observations can answer this question. First, one can only advance future profits. Past profits that were not distributed cannot be advanced but, only distributed. Second, subparagraph b) of paragraph 1 of Section 432-A specifically states that the mid-term balance should take into account, when demonstrating the existence of amounts available for distribution, the results recorded during the elapsed period of the fiscal year of the advance. Therefore the profits available for advances are the ones recorded in the fiscal year of the advance.

However, not all the profit of the fiscal year can be paid in advance to shareholders. In fact, Section 432-A establishes two limitations. First, the amounts considered available in the mid-term balance must respect the imperative rule that the advance can only take place if after its execution the company´s net worth does not become inferior to the sum of the aggregate amount of share capital, legal and mandatory statutory reserves. Second, only half of the amount considered available in the mid-term balance can be distributed as advances on account of profits.

The mid-term balance

The third problem faced by companies concerns the mid-term balance deadline.

The law determines that it must be executed within 30 days, but does not make clear the date from which it starts counting. Attending to the letter of the Law, the mid-term balance must be drafted up to 30 days prior to the shareholders resolution. Although the solution is not optimal – it creates time constrains to the resolution – is the most adequate according to the letter of the Law.

Lack of profits

The last problem we will address is the legal consequences for the verification, on the annual accounts, of the inexistence of profits and/or the existence of losses.

The answer to the question of whether the shareholders have to refund the company in case there are no profits at the end of the fiscal year is surely one of the main concerns of shareholders and is a perfectly understandable concern. The answer is that they are unlikely to have to make a refund.

The Commercial Code protects shareholders that have received amounts from the company as profits, determining that shareholders do not have to return amounts received in breach of the law if they did not know of the irregularity and, according to the circumstances, did not have an obligation to know of it. Since the advance is proposed by the board of directors, with the favourable opinion of the supervisory board, it is unlikely that the shareholders will be forced to return the amounts received to the company.