No-asset insolvency: the legal way out for a small company that cannot meet its debts

Many small and medium-sized companies reach a point where debt far exceeds available assets, activity has ceased or is unviable, and the shareholders do not know how to close down with legal safeguards. The law's answer to this situation is no-asset insolvency proceedings, governed by Article 37 of the Consolidated Insolvency Act (TRLC), approved by Royal Legislative Decree 1/2020. It is not an outcome anyone wishes for; it is, instead, the tool that allows a company to close properly.

What no-asset insolvency is

Article 37.1 of the Act provides that the court will issue an order concluding the proceedings where, once insolvency is declared, the estate is insufficient to satisfy the claims against the estate —that is, the costs of the insolvency procedure itself, outstanding wages, leases during the proceedings and similar claims arising after the declaration. In practice, where the company has debts but lacks sufficient assets to pay even the costs of the process, the court closes the proceedings with a speed that would not otherwise be possible.

This mechanism differs from ordinary insolvency, where there are sufficient assets to pursue an arrangement or to liquidate: in no-asset insolvency the process is far shorter, costs are minimal and the result is the extinction of the legal entity, with cancellation of its entries in the Commercial Registry.

Why it is the right route for a small company

A company that has ceased trading and has accumulated debts —with suppliers, with the Tax Agency, with Social Security, with the landlord of its premises— faces, without this route, a state of legal limbo: the company formally exists in the Commercial Registry, the directors remain liable for its obligations, and the tax and social security authorities continue to accrue interest and surcharges on a debt that will never be paid. No-asset insolvency brings that situation to an orderly end.

There are three reasons why it is the right route:

• Genuine extinction of the company: the conclusion order, notified to the Commercial Registry, allows the entries to be cancelled and the company to be wound up with full registry effect.
• Stay of enforcement: from the declaration of insolvency, individual enforcement actions by creditors are suspended (Articles 154 et seq. of the Act), preventing isolated actions against the (few) remaining assets.
• Low cost: as there is no estate to manage, the process does not require a lengthy insolvency administration, which makes it economically viable even for the smallest companies.

What happens to the debts

The conclusion order does not, in itself, cancel the debts as regards creditors. What it does is extinguish the legal entity: if the company ceases to exist, creditors no longer have anyone to pursue —unless the insolvency has been classified as culpable, with the consequences set out below.

For the Tax Agency and Social Security, cancellation of the company's registration entails closing the enforcement collection procedures, since there is no longer a taxable person to pursue. Tax debts are not, however, extinguished in a technical sense: if hidden assets were to appear in the future or director liability were established, they could be claimed. The dissolution and cancellation ordered through the insolvency are the director's best guarantee that the matter is closed as cleanly as possible.

The director's liability: when they are liable and when they are not

The question that most concerns directors of insolvent companies is whether they will be personally liable for the company's debts. The answer is nuanced:

• In blameless insolvency: if the insolvency results from objective economic circumstances —loss of clients, COVID, shrinking margins— and the director has acted in good faith, the insolvency is classified as fortuitous and the director is not personally liable for the company's debts. The corporate veil holds.
• In culpable insolvency: where the director is found to have caused or aggravated the insolvency through wilful misconduct or gross negligence —deliberate delay in filing, transfer of assets without consideration, irregular accounting, transactions to the detriment of creditors— the court may disqualify them from managing other companies for a period of two to fifteen years and order them to cover the insolvency shortfall in whole or in part (Articles 455 et seq. of the Act).
• Action for tortious liability: separately from the insolvency, creditors may bring liability actions against the directors for damage caused (Article 241 of the Companies Act) or for breaching the duty to wind up the company when required (Article 367 of the Companies Act).

The practical message is clear: the sooner insolvency is filed once it is detected, the lower the risk to the director. Delay in filing —especially where debts continue to be incurred with third parties in the knowledge that they cannot be paid— is the main source of a culpable classification.

When to file

The duty to file for insolvency arises when the company can no longer regularly meet its enforceable obligations (Article 2 of the Act) and there is a maximum period of two months from the moment the director knew or ought to have known of that situation (Article 5 of the Act). In practice, most directors file too late: insolvency is sought long after it was already obvious, which increases personal exposure.

The signs that the time has come are: an inability to pay wages or social security contributions, systematically returned cheques or direct debits, creditor enforcement against company assets, or demands from the Tax Agency with the start of enforcement proceedings.

The position of the self-employed: insolvency as the gateway to a fresh start

For individuals —the self-employed, sole traders— no-asset insolvency does not entail the cancellation of a registration, but it can be the gateway to the discharge of unsatisfied liabilities mechanism, known as the second-chance scheme, governed by Articles 486 et seq. of the Act. Where the debtor lacks sufficient assets, they may apply directly for the discharge of liabilities, with or without liquidation, if they meet the good-faith requirements. The link between no-asset insolvency and the discharge mechanism is one of the most relevant routes for self-employed people in a situation of unrecoverable over-indebtedness.

How we help you close your company with legal certainty at RCM Legal

Two obstacles usually prevent directors from acting in time: uncertainty about their personal liability and unfamiliarity with the procedure. The reality is that the sooner insolvency is filed once it is detected, the lower the director's exposure. Delay —especially where debts continue to be incurred with third parties in the knowledge that they cannot be paid— is the main cause of a culpable classification and, with it, of disqualification and liability for the shortfall.

At RCM Legal we analyse each company's situation, assess whether no-asset insolvency is the most appropriate route or whether a viable alternative exists —ordinary dissolution, out-of-court payment agreement, renegotiation with creditors— prepare the application before the competent Commercial Court and defend the director in the classification stage. If you run a company in the Region of Murcia with debts you cannot meet and do not know how to proceed, tell us about your situation.