Impact of company abandonment in Spain on the system of managerial liability

PDF Eurofenix Autumn 2010 – Company Abandonment in Spain

The Spanish legal system provides certain protections for creditors of companies that have ended their commercial trading. These companies have been abandoned by their partners and managers, rendering them inactive, yet they have not dissolved and liquidated according to the established processes established by law for that effect. In most cases, they are insolvent companies unwilling to deal with their corporate debts and obligations. Their liabilities are limited to eliminating commercial trading, abandoning the principal place of business, failing to disclose annual accounts with the Commercial Registry, ceasing payment of taxes and leaving the company inactive and non-compliant with all other corporate obligations required by law.

This situation can cause considerable harm to the creditors of these normally insolvent businesses as it upsets the debt collection process. In this case, our system opens a door for the creditors of companies to potentially extend liability to corporate managers, whose personal assets can be attached to account for the existing debt under certain circumstances.

To better understand the regulation behind this matter, we must first look at the two types of liability established under corporate law. This article focuses on liability under the Law of Limited Liability Companies and Stock Corporations, apart from the specific liability established in bankruptcy law.

Spanish laws recognize two types of managerial liability: (i) liability under articles 260 and 262 of the Law on Stock Corporations (Ley de Sociedades Anónimas, LSA)) and, similarly, in articles 104 and 105 of the Law on Limited Liability Companies (Ley de Sociedades de Responsabilidad Limitada, LSRL) and (ii) liability under articles 133 and 135 of the Law on Stock Corporations, both applicable to limited liability companies.

Liability under Articles 260 and 262 of the Law on Stock Corporations, and Articles 104 and 105 of the Law on Limited Liability Companies

Article 260 of the Law on Stock Corporations establishes the different grounds for the dissolution of a closed corporation. Among those are:

• Conclusion of the business that is the objective of the stock corporation, or manifestation of the impossibility of achieving the business purpose, or interruption of its corporate bodies to the extent that functioning becomes impossible.
• As a result of losses that leave net assets at an amount equal to less than half the capital stock unless this amount increases or decreases sufficiently, and as long as it is not appropriate to file for bankruptcy under Law 22/2003, 9 July, Bankruptcy (Ley 22/2003, de 9 de julio, Concursal).

De facto abandonment of the company is not one of the established grounds for dissolution; however, the law has come to recognize it as such under point 1. It is common in judicial proceedings to show that the company, though failing to disclose its annual accounts, was in the abovementioned financial position (due to losses, assets have been reduced to less than half of its corporate capital: point 2).

Liability under Articles 133 and 135 of the Law on Stock Corporations

According to Article 133 of the Law on Stock Corporations, managers may be personally liable to creditors and third parties for the harm caused by acts or omissions contrary to the Law, or for non-compliance with the duties inherent to their position. A finding of this type of liability is more complex and much more limited because it requires: i) non-compliance (the law has come to recognize de facto abandonment of the company as an act of managerial non-compliance with legal obligations); ii) more damages have accumulated, which could be non-payment of debts; and iii) what is even more complex, a showing of a causal relationship between the non-compliance and damages. Despite judicial decisions that have found managerial liability for abandonment in fact, many resolutions have not held the same because of the failure to establish a causal relationship.

There are certain managerial obligations established by law in the event one of the grounds for dissolution occurs. Non-compliance with these obligations generates JOINT liability for partnership debts. Specifically, managers must hold a Board Meeting to adopt the dissolution agreement within two months from the time a cause for dissolution arises. If the agreement of the Board is against dissolution, or if dissolution cannot be achieved, the managers must request judicial dissolution, which should also be sought within two months.

The principal characteristic of this liability is that it deals with a quasi-objective liability or ex-lege. That is, the abandonment, coupled with non-compliance with the obligations described in the previous paragraph, is sufficient to extend liability to managers with their assets. However, this liability has two important limits:

• First, it is established in the Law that managers may only be liable for corporate debts arising after the ground for dissolution. Thus, managers are not liable for debts before abandonment or insolvency. Nonetheless, a presumption in the favour of creditors exists, since it is presumed that debts will occur after the ground for dissolution.
• The second limit, recognized in many decisions, is that managers may only be liable if creditors are acting in good faith.

In conclusion, managers must be especially attentive to potential existing liabilities to liquidate and dissolve businesses according to the established legal procedures. Non-compliance with established legal obligations can produce a strict system of liability under which managers will be held accountable for their assets.

For additional information regarding company abandonment in Spain,