In Spain, company directors have a legal obligation to call a General meeting to consider dissolution under the following circumstances:
- Cessation of the company’s activities
- Fulfillment of the company’s corporate purpose
- Manifest impossibility of achieving the corporate purpose, such as a lack of a necessity to operate
- Paralysis of the company’s corporate bodies
- Accumulated losses resulting in the reduction of equity to less than half of the share capital
- Reduction of the share capital below the legal minimum
- When the nominal value of the shares without voting rights exceeds half the disbursed share capital and the proportion is not restored within two years.
The Spanish insolvency reform, in force since September 2022, has introduced amendments to the Corporate Companies Act (La Ley de Sociedades de Capital or L.S.C.). These changes have modified the regulations concerning the liability of company directors.
Article 365: Obligation to convene the general meeting
Article 365 of the L.S.C. requires directors to call a General meeting when there is a cause for dissolution. Directors must do this within two months of the cause for dissolution. The meeting must decide whether to dissolve the company or take other action to eliminate the grounds for dissolution.
The most common case for dissolution is that of companies in a situation of asset imbalance due to the substantial reduction of their assets, which is often the result of accumulated losses. Supreme Court case law in Spain has consistently ruled on this matter. The two-month period for convening the general meeting begins the day the directors became aware or should have become aware of the cause for dissolution.
However, the amendment of the L.S.C. through the recent insolvency reform means that this obligation lapses in two specific cases. These exceptions apply when the directors:
- Have duly requested the company’s declaration of insolvency or;
- Have informed the Commercial Court of negotiations with creditors (pre-insolvency scenario).
Article 367: Joint liability of the directors
Article 367 of L.S.C. maintains the joint liability of directors for failure to comply with their obligation to convene the general meeting to decide on the company’s dissolution. It means that the directors are liable for the company’s debts incurred after the cause of dissolution.
However, there is an exemption when, within two months, the directors have:
- Informed the Commercial Court of negotiations with creditors to establish a restructuring plan.
- Requested the declaration of insolvency.
Directors qualify for the exemption by demonstrating that they have taken all reasonable steps to protect the company’s creditors. By informing the Commercial Court or requesting the declaration of insolvency, the directors are alerting creditors to the company’s financial difficulties and allowing them to take action to protect their interests.
Essentially, directors must be clear about when to convene a general meeting to approve the decision to dissolve the company. Failure to comply with this requirement can result in significant liability. Additionally, in the event of the company’s insolvency, directors must understand how to fulfil this obligation while considering their options under Spanish insolvency law.
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