Dissolution and liquidation of a Spanish company: stages, liquidation quota and liquidator's liability

Closing down a company is not a matter of ceasing to trade or filing one last tax return: it is a regulated legal process with three distinct stages —dissolution, liquidation and extinction— set out in detail by the Spanish Companies Act. Getting it wrong leaves debts alive, personal liability that outlives the business, and a company that, as far as the Commercial Registry is concerned, still exists. It is worth understanding each step, and its deadlines, before starting.

What dissolution, liquidation and extinction are: three distinct stages

The Spanish Companies Act —Royal Legislative Decree 1/2010 of 2 July (Ley de Sociedades de Capital, LSC)— distinguishes three moments that are routinely confused in practice. Dissolution opens the liquidation period: under its article 371, a dissolved company retains its legal personality while liquidation is carried out and must add the words "en liquidación" (in liquidation) to its corporate name. Liquidation is the set of operations aimed at completing pending business, collecting the company's receivables, selling its assets, paying its debts and distributing the remaining assets among the shareholders. Extinction comes with the execution of the public deed of extinction governed by article 395 and its registration at the Commercial Registry, where it is recorded that all entries relating to the company are cancelled, as required by article 396. Only then does the company cease to exist. Months may pass between dissolution and extinction, and throughout that period the company remains a holder of rights and obligations.

What the grounds for dissolution are

A company limited by shares or quotas must be dissolved on the statutory grounds listed in article 363: cessation of the activity or activities making up the corporate purpose —cessation being deemed to have occurred after a period of inactivity exceeding one year—, completion of the business constituting that purpose, manifest impossibility of achieving the corporate object, paralysis of the corporate bodies making their functioning impossible, losses reducing net equity to less than half of the share capital —unless capital is increased or reduced to a sufficient extent and insolvency proceedings are not called for—, reduction of capital below the legal minimum, and any other ground laid down in the articles of association. Alongside these, article 368 allows the general meeting to resolve on dissolution at will, subject to the majority requirements for amending the articles.

Where a statutory or contractual ground arises, the directors must call a general meeting within two months, under article 365, so that it may resolve on dissolution or adopt the resolutions needed to remove the ground. Failure to comply carries a severe sanction: article 367 makes directors jointly and severally liable —as it does those who fail to apply for judicial dissolution within the two months following the meeting or the date set for it— for corporate obligations arising after the ground for dissolution occurred, such obligations being presumed to be subsequent unless proved otherwise.

Who liquidates the company: the role and duties of the liquidator

When the liquidation period opens, the directors cease to hold office and their power of representation is extinguished, under article 374. Their place is taken by the liquidators: unless the articles provide otherwise or the general meeting resolving on dissolution appoints others, those who were directors at that time automatically become liquidators by operation of article 376. They assume the functions conferred by law and must safeguard the integrity of the company's assets until they are liquidated and distributed among the shareholders, in accordance with article 375; the power of representation belongs to each liquidator individually, unless the articles state otherwise, and extends to all operations required for the liquidation, under article 379.

Their duties are set out in articles 383 and following: to draw up an inventory and a balance sheet of the company within three months from the opening of the liquidation, referring to the date of dissolution; to complete pending operations and carry out any new ones needed for the liquidation; to collect the company's receivables and pay its debts; and to sell the corporate assets. It is a position of trust and responsibility: the liquidator manages assets that no longer serve the business but are earmarked, first and foremost, to satisfy the creditors.

What each shareholder receives: the final balance sheet and the liquidation quota

Once the liquidation operations are complete, the liquidators submit to the general meeting for approval a final balance sheet, a full report on those operations and a plan for dividing the resulting assets among the shareholders, under article 390. The approving resolution may be challenged, within two months of its adoption, by shareholders who did not vote in favour.

The division of the assets is carried out in accordance with the rules laid down in the articles of association or, failing that, those set by the general meeting, under article 391 —a point worth anticipating when drafting the articles and the shareholders' agreement—. The second paragraph of that same article sets an inflexible order: liquidators may not pay the liquidation quota to shareholders without first satisfying the creditors' claims or depositing the corresponding amounts with a credit institution in the municipality of the registered office. And unless the articles provide otherwise, article 392 establishes that each shareholder's liquidation quota is proportionate to its holding in the share capital. Early distribution, before debts are paid or provisioned, is one of the most frequent sources of liability and of subsequent disputes between shareholders.

What liability liquidators and shareholders bear for post-closure assets and debts

Cancellation at the Registry does not seal the company's history for good. Article 397 makes liquidators liable to shareholders and creditors for any damage caused to them through wilful misconduct or negligence in the performance of their office. If corporate assets appear after the entries have been cancelled, the liquidators must allocate to the former shareholders the additional quota due to them, converting the assets into cash where necessary, under article 398. And where what appears is a post-closure liability —unpaid corporate debts—, article 399 makes the former shareholders jointly and severally liable, although only up to the amount they received as their liquidation quota and without prejudice to the liquidators' own liability. That cap is the key point: closing badly, without paying or providing for tax, employment or contractual contingencies, does not make them disappear; it shifts them onto the shareholders and the liquidator.

When reactivating the company is preferable to liquidating it

Not every ground for dissolution must lead to closure. Article 370 allows the general meeting to resolve on the reactivation —the return of the dissolved company to active life— provided that the ground for dissolution has disappeared, that the company's book equity is not lower than its share capital and that payment of the liquidation quota to shareholders has not begun; reactivation is not available where dissolution occurred by operation of law. The resolution is adopted with the requirements for amending the articles, any shareholder who does not vote in favour has a right to withdraw from the company, and creditors may object on the same terms as in a capital reduction. Where, by contrast, liabilities exceed assets and the company is insolvent, the appropriate route is not a corporate liquidation but insolvency proceedings: a duly filed insolvency petition —or notice to the court of negotiations towards a restructuring plan— relieves the directors of the duty to call the dissolution meeting, under the third paragraph of article 365.

How we help with company liquidations at RCM Legal

Two mistakes account for most of the problems we see: distributing assets among shareholders before every debt has been paid or deposited, and treating the company as extinct without closing tax, employment or contractual contingencies that later resurface as post-closure liabilities. To these must be added the risk of failing to call the general meeting in time when a ground for dissolution arises, which exposes directors to joint and several liability for corporate obligations arising after that ground, and the risk of a hasty liquidation that overlooks claims not yet due. A poorly ordered liquidation saves no time: it shifts the debt onto whoever handled it.

At RCM Legal we handle the entire dissolution and liquidation process: we verify the ground, structure the liquidation stage, quantify and provide for contingencies, and take the company through to its cancellation at the Commercial Registry with certainty, assessing as well whether reactivation is preferable to closure. As commercial lawyers in Murcia specialising in corporate matters, if you are planning to close a company, tell us about your situation and we will design a closure that leaves no loose ends.