When financial statements show accumulated losses reaching half of capital, the matter moves from being a question of performance to a statutory obligation on whoever manages the company, with a defined period and a defined action. Delay is not merely poor management — it is a breach of duty.
The difficulty is that most of what is published on this subject in English — including recently published material — still rests on the repealed Companies Law. It cites articles that no longer exist and states a legal consequence that has materially changed. We address that difference first, because it is the most important point here.
Table of contents
What the new Companies Law changed
The Companies Law issued by Royal Decree No. M/132 has been in force since 19 January 2023 and repealed the previous Companies Law. On this particular question it made two material changes:
| Issue | Under the repealed law | Under the law in force |
|---|---|---|
| Effect of losses reaching the prescribed level | The company was, in defined cases, deemed dissolved by operation of law | Automatic dissolution by operation of law has been abolished; the matter is put to the partners to decide |
| Statutory reserve | A percentage of net profit had to be set aside annually until a set proportion of capital was reached — mandatory | No longer mandatory in that form; the creation of reserves is governed by the company constitutional documents and falls to the general assembly |
A practical warning: the article numbers that recur in published commentary — such as 150, 181 and 129 — are article numbers of the repealed law. Citing them today as provisions in force is a common error, and some published material builds on it the incorrect conclusion that the company is dissolved automatically. If you encounter those numbers presented as the current rule, the correct reference is the text of the new law, not that commentary.
The rule in force for limited liability companies
This section addresses limited liability companies specifically. Joint stock companies are governed by a separate provision with a different mechanism, for which the reference is the text of the law in force.
Under the law in force, where the losses of a limited liability company reach half of its capital:
- A duty falls on the manager — or board of managers — as soon as they become aware that losses have reached that level.
- The partners must be called to a meeting within sixty days of that awareness.
- The matter is put to the partners to decide: either to continue the company and address its position, or to dissolve it.
The decision therefore rests with the partners rather than following automatically by operation of law. The manager’s liability arises where the partners are not called within the period or the matter is not put to them.
Because this touches potential personal liability for whoever manages the company, the sounder course as the threshold approaches is to consult the text of the law in force and its implementing regulations and to take legal advice alongside accounting advice, rather than relying on published summaries.
Listed companies: a much lower disclosure threshold
Companies listed on the capital market are subject to an additional and earlier obligation: the disclosure obligation begins once accumulated losses reach 20% of capital, under the Instructions on Company Announcements for listed joint stock companies issued by the Board of the Capital Market Authority, as amended by Board Resolution No. 3-79-2023 dated 19/02/1445H.
Those Instructions do not set a single threshold but graduated bands — 20%, then 35%, then 50% of capital — with different disclosure requirements and consequences at each. For the detail, the reference is the version of the Instructions in force on the Authority website, not published summaries, many of which still cite Article 150 of the repealed Companies Law.
The threshold that triggers disclosure to investors therefore begins at 20%, well before the threshold that requires the matter to be put to the partners.
How the threshold is actually measured: three common errors
1. The reference figure is accumulated losses, not the year’s loss
What is meant is the balance of accumulated losses (negative retained earnings) in the statement of financial position, not the result for a single year. A company with a loss in one year may be nowhere near the threshold if it has prior retained earnings — and the reverse is equally true.
2. The ratio is measured against capital, not total equity
Confusing issued capital with total equity changes the answer entirely, particularly in companies holding reserves, share premium, or partner current accounts.
3. Timing runs from awareness, not from the annual financial statements
The sixty-day period runs from the manager’s awareness that losses have reached the threshold, not from the date the annual financial statements are approved. A business that does not prepare interim financial information during the year discovers the position late, and the period will already have begun at a point that is difficult to dispute.
Because the start date of the period bears directly on the manager liability, the wording of the provision in force should be confirmed when dating that period in a specific case.
This third point is the most significant practical consequence of weak in-year financial monitoring: the statutory obligation does not wait for the year-end close.
The options before the partners
When the matter is put to them, the alternatives usually revolve around the following, each with a different accounting and tax effect that should be assessed before the decision rather than after:
| Option | Accounting effect | What to watch |
|---|---|---|
| Injecting new capital | Capital increase and improvement in the ratio | Amendment of the constitutional documents and statutory formalities |
| Reducing capital to absorb losses | Accumulated losses extinguished against a capital reduction | Specific statutory procedures and protection of creditors’ rights |
| Converting partner current accounts to capital | Transfer from liabilities to equity | Documenting and substantiating the current account balances |
| Continuing with a remediation plan | No immediate effect | The plan must be supported by verifiable figures, not intentions |
| Dissolution and liquidation | Move to the liquidation basis of preparation | The basis of preparation changes from going concern to a liquidation basis |
The effect on the auditor’s report
Losses reaching this level require the auditor to assess going concern: do events or conditions exist that cast significant doubt on the entity’s ability to continue as a going concern? And if so, has management addressed them with a realistic plan and disclosed them adequately?
The outcome may be an emphasis of matter paragraph, a qualified opinion, or an adverse opinion — depending on the adequacy of disclosure and the realism of the plan. That in turn affects how banks and counterparties deal with the company: a commercial consequence that arrives before any regulatory one.
Hence the importance of having the remediation plan ready and supported by figures before audit work begins, rather than drafting it under the pressure of finalising the report.
Frequently asked questions
Is a company automatically dissolved if losses reach half of capital?
No — not under the Companies Law in force since 19 January 2023. Automatic dissolution by operation of law has been abolished, and the matter is put to the partners to decide whether to continue or dissolve. Material stating otherwise generally rests on the repealed Companies Law.
What period does the manager have?
The partners must be called to a meeting within sixty days of the manager becoming aware that losses have reached half of capital, so that the matter can be put to them. The period runs from the date of awareness, not from the date the annual financial statements are approved.
Is the ratio measured against the year loss or accumulated losses?
Against the balance of accumulated losses in the statement of financial position, not the result for a single year. The ratio is also measured against capital specifically, not against total equity.
What is the disclosure threshold for listed companies?
The disclosure obligation begins once accumulated losses reach 20% of capital, under the Instructions on Company Announcements for listed joint stock companies issued by the Board of the Capital Market Authority, as amended by Board Resolution No. 3-79-2023 dated 19/02/1445H. Those Instructions set graduated bands — 20%, then 35%, then 50% — with different disclosure requirements at each, and the reference for the detail is the version in force on the Authority website. It is in any event a far lower threshold than the one requiring the matter to be put to the partners.
Is the statutory reserve still mandatory?
Not in the form required under the repealed law, which obliged companies to set aside a percentage of net profit annually until a set proportion of capital was reached. Under the law in force, the creation of reserves is governed by the company constitutional documents and falls within the competence of the general assembly.
How does this affect the auditor report?
It requires the auditor to assess going concern: whether conditions exist that cast significant doubt on the ability to continue, and whether management has addressed them with a realistic plan and disclosed them adequately. Depending on the adequacy of disclosure and the realism of the plan, the outcome may be an emphasis of matter paragraph, a qualified opinion, or an adverse opinion.
How we can help
At Almousa & Altamimi, Certified Public Accountants and Auditors we establish the company’s actual position: computing accumulated losses and the ratio to capital on a correct basis, identifying the date the threshold was reached rather than the date it was noticed, assessing the accounting and tax effect of each option before the partners, and preparing the figures underpinning the remediation plan so that it withstands the going concern assessment.
See our financial consulting service, or contact us if your company is approaching this threshold. For the related statutory deadlines, see filing financial statements on Qawaem.
Quick reference: Glossary · FAQ
Official sources: Companies Law issued by Royal Decree No. M/132, in force from 19 January 2023, and its Implementing Regulations; Instructions on Company Announcements for listed joint stock companies issued by the Board of the Capital Market Authority, as amended by Board Resolution No. 3-79-2023 dated 19/02/1445H. This content is general guidance, does not constitute a legal opinion, and is not a substitute for consulting the text of the law in force or for professional and legal advice on a specific case. Last updated: 14 September 2026.
The two governing articles: 132 for joint stock companies and 182 for LLCs
The Companies Law does not set one rule for everyone. It sets two, with different deadlines and different steps:
- Joint stock company — Article 132: where losses reach half of the issued capital, the board must disclose this and the recommendations it has reached on those losses within sixty days of the date it learns the threshold has been reached, and call the extraordinary general assembly to meet within one hundred and eighty days of that date, to consider the continuation of the company together with any measures necessary to address the losses, or its dissolution.
- Limited liability company — Article 182: where the company’s losses reach half of its capital, the manager must call the general assembly of partners to meet within sixty days of the date of learning that the losses have reached that level, to consider the continuation of the company together with any measures necessary to address the losses, or its dissolution.
Three practical differences follow: who bears the obligation (the board in a JSC, the manager in an LLC); the reference for the half (issued capital in a JSC); and the deadline (sixty days to disclose and one hundred and eighty to meet in a JSC, against sixty days to call the meeting in an LLC). Note that in both the period runs from the date of knowledge, not from the financial year-end. In practice that means the clock can start from interim statements or a trial balance showing the threshold has been reached, not from approval of the annual statements.
Under both articles the consequence is no longer automatic dissolution by operation of law, but putting the matter to the partners or shareholders for a decision: continue while addressing the losses, or dissolve.
Sources
- Companies Law (Royal Decree M/132) — Article 132 (losses of a joint stock company) and Article 182 (losses of a limited liability company)
- Companies Law — Article 17 (preparation of financial statements under the approved standards and filing within six months)
- Instructions on the Announcements of Listed Joint Stock Companies — Capital Market Authority (tiered disclosure thresholds for accumulated losses)
لا تعليق