Closing a Subsidiary in Spain: With or Without Bankruptcy Proceedings?
The closing of a subsidiary in Spain for economic reasons raises numerous questions for partners as to the appropriate procedure to follow. This article discusses the two central mechanisms offered by Spanish law, emphasizing the advantages and disadvantages of each of them.
The main advantages of closing a subsidiary without bankruptcy proceedings are:
- Legal certainty as to the course of liquidation
- Greater control and flexibility in settlement transactions
- The liquidation procedure’s shorter duration
- Greater freedom to act without the supervision of bankruptcy administrators.
Closing a subsidiary with bankruptcy proceedings
According to the law in Spain, a company is considered insolvent when it cannot regularly comply with its obligations; that is, when it cannot meet the payment obligations to which it has committed. The situation of insolvency may be current or imminent.
Once the company’s managers have established the existence of a situation of insolvency, they must undertake voluntary bankruptcy proceedings within two months from the date on which they discovered (or should have discovered) said situation, notwithstanding the provisions of Article 5 bis of the Spanish Bankruptcy Law.
In general terms, bankruptcy proceedings in Spain are characterised by two phases: the common phase and the agreement or liquidation phase. All bankruptcy proceedings are carried out under the supervision of a commercial judge, who will be responsible for appointing the panel of bankruptcy trustees.
Disadvantages of a subsidiary’s closure with bankruptcy proceedings
The main disadvantages of closing a subsidiary through bankruptcy proceedings are:
- The proceedings’ length of time
- Greater legal uncertainty regarding the course of the proceedings and the unpredictability of the judge and/or bankruptcy trustees
- Careful preparation of all documents when applying for the opening of the bankruptcy proceedings
- Careful and diligent collaboration between company’s managers and the judge and bankruptcy trustees
- Possible rescission of legal dealings by bankruptcy trustees
- Possible declaration of liability against company managers and, if applicable, against Group partners or companies.
Advantages of a subsidiary’s closure with bankruptcy proceedings
The main advantages are:
- The cost for partners in terms of paying the subsidiary’s creditors is reduced to the assets existing at the time of the bankruptcy declaration
- During the liquidation phase, the appointed bankruptcy trustee assumes the role of liquidator (converting the existing assets to cash and paying creditors from the available assets).
Closing down a subsidiary in Spain, whether with or without bankruptcy proceedings, has its advantages and disadvantages. The circumstances of each individual case will determine the best option.
This article is not considered as legal advice