To sum up, companies that suffer from patrimonial imbalances and/or situations of insolvency can either reach agreements with their creditors (partners or third parties) to guarantee the viability and the survival of the business or, if they default, put an end to the corporate activities and proceed to the adequate dissolution and winding-up of the company.
Such a dissolution and winding-up should occur either through the extra-judiciary framework (a dissolution and winding-up as defined in Royal Legislative Decree 1/2010, of 2 July 2010, which approves the amended text of the Companies Act (LCC)) or through the judiciary framework (the phase of a winding-up due to bankruptcy, described in Law 22/2003, of 9 July 2003, Bankruptcy (the LB)).
The obligation to use either process — judiciary or extra judiciary — will depend on the solvency or insolvency of the company and its capacity to face its obligations in the short or long term. Generally, the winding up of a company can be completed through the extrajudicial framework when the total assets are greater than the total liabilities and the company can pay debts (both those that are due in the short and long term). When the company is insolvent and cannot regularly face its more immediate obligations (when its current assets are smaller than its current liabilities), the winding up of the company should be completed through the judicial framework (the process of insolvency).
Dissolution and extrajudicial winding-up (Art. 360 and following articles of the LCC)
The dissolution and winding-up of a company consists of extinguishing the relationships established with third parties and, if appropriate, distributing the remaining property between partners/shareholders, to obtain the disappearance of the company. These are the steps established by the LCC for an ordered winding-up[1] in extrajudicial cases:
- Dissolution
- Winding-up
- Disappearance
The dissolution is simply a prerequisite act for the winding-up, generally accomplished through an agreement of the General Meeting of the company. Besides the simple will to dissolve or wind up the company, a range of legal causes make the dissolution, and then the winding-up compulsory.
The causes are mainly the following[2]:
- The inactivity of the company for more than one year, the accomplishment of the company’s objective, the manifest impossibility of accomplishing the company’s objective or the paralysis of the administrative bodies making its working impossible;
- Losses which reduce the real estate to a quantity smaller than half of the social capital without the social capital increasing or decreasing sufficiently, and always without the possibility to claim the process of insolvency[3]; or,
- The social capital is reduced below the legal minimum; or
- Some other causes outlined in the statute
In any of the causes previously mentioned, the administrators of the company have to convene the general meeting within two months of obtaining knowledge of the cause of dissolution, so that the general meeting can adopt the agreement of dissolution or the corresponding agreement to end the cause of the dissolution (for example, the increasing the social capital)[4]. If the administrators violate this duty, they will be collectively responsible for the corporate liabilities born after the appearance of the legal cause of dissolution.
Once the general meeting grants the dissolution, the company immediately enters a period of winding-up and the administrative body disappears and is substituted by liquidators. The winding-up consists of gathering the assets and the operations to fully satisfy all the corporate debts and distribute any remaining property between the partners. In principle, this winding-up in an extrajudicial framework can only take place when the company is solvent and can pay all its debts. On the contrary, the only way possible is the process of insolvency.
As the phase of winding-up is finalised (payment of the creditors and, if appropriate, distribution of the liquidating dividends between the partners/shareholders), the disappearance of the company will occur when the liquidators present the corresponding documentation (the inscription of the disappearance with a final balance of the winding-up) to the Spanish Trade Register and ask for the cancellation of the accounts of the company. At that moment, the liquidators will deposit to the register the books and documents of the disappeared company.
If you need additional information regarding the winding-up of a company in Spain,
[1] The process of winding-up should not be confused with the winding-up that the Law on Bankruptcy outlines as one of the possible situations that can lead to the process of insolvency of the insolvent debtor.
[2] Art. 363 LCC.
[3] This is the main cause of dissolution — known as “patrimonial imbalance” — which does not correspond to a situation of insolvency. It means that a company can be perfectly solvent and accomplish its regular obligations, yet has a patrimonial imbalance (for example having negative funds because of accumulated losses) and inversely.
[4] Art. 365 LCC.
