Due to the economic and financial crisis in Spain, many companies declared bankruptcy in the past few years. Notably, Spanish subsidiaries of solvent German parent companies seem to prefer the legal option of company liquidation.
The important characteristics of company liquidation are mainly the termination of legal relationships with third parties and, if the case arises, splitting the company’s assets among the associates in order to terminate the company.
The Law on Corporations (Ley de Sociedades de Capital, aka LSC) provides for dissolution, liquidation and termination. Generally, dissolution is a decision by the shareholders’ meeting to initiate the liquidation process. The causes for dissolution as stated in the provisions of the LSC include:
- Failure to achieve the company’s purpose or its clear impossibility, or the deadlock of the company’s governing bodies so that continuation is impossible
- Losses that reduce the company’s assets to an amount lower than half the company’s share capital, unless the company’s share capital increases enough that filing insolvency is not necessary
- Reduction of the company’s share capital to an amount lower than the legal required minimum of 3,000€ for limited liability companies.
Notwithstanding the above, the company can also be dissolved through a simple decision by the general meeting.
The consequences of such a decision are among others:
- The company immediately enters the liquidation process
- The company’s profit activity is suspended
- The administration body will step down and be replaced by liquidators (usually they are the administrators themselves who become liquidators)
Contrary to dissolution, a simple legal act, liquidation is a process aimed to split the company’s assets after all the company’s obligations have been satisfied. During this phase, the company retains its legal personality.
Liquidators are responsible for the execution of this process. As a consequence of the dissolution, the administrators lose their representation power to enter new contracts and commitments and are replaced by liquidators who take over the function of administration body and company representative during the liquidation phase.
In summary, the liquidators’ essential functions are:
- Drafting the inventory and the opening balance
- Directing and supervising the accounts
- Execution of the pending business transactions
- Sale of the company’s assets
- Payments to the company’s creditors and associates
- Company representation
- Drafting the closing balance and the planned allocation of the company’s assets
Regarding the payments to creditors and associates, the rules set by the law for their execution are the following:
- The liquidators cannot allocate the company’s assets among the associates until all the creditors have been paid or the payment demands against the company have been settled
- The liquidators must first secure the payment of the payment demands
The goal of these rules is to stop any creditor from being wronged by the splitting of the assets.
Wronged creditors can contest the transactions that took place illegally during the allocation of the assets. This action is directed against the company and the associates.
The termination of the company takes place as soon as the liquidators have brought the correct documents (dissolution decision, liquidator appointment, acceptance of the liquidation balance sheet, allocation of the company’s assets, etc.), have them notarised, and go to the Commercial Register with the correct documentation to file cancellation of the company’s inscription. At the same time, the liquidators file the dissolved society’s books and documents with this Register.
Furthermore, all the company’s current contracts (i.e. labour, rental, leasing, insurance, phone, office cleaning, bank contracts, etc.) must be terminated for the liquidation and the consequent termination of the company.
This article is not considered as legal advice