Insolvency Proceeding versus Company Liquidation

Insolvency proceedings and company liquidation are two of the alternatives that companies face in times of crisis.

Legal Cause for Dissolution

Companies find themselves in a legal cause for dissolution when according to article 363.1.e) of the Spanish Companies Act their financial statements show losses that leave the equity reduced to an amount less than half the share capital.

Insolvency proceeding and Company Liquidation in the Context of Insolvency

Contrary to popular belief, the fact that a company finds itself in a legal cause for dissolution does not mean that it must immediately request for insolvency. This is only necessary when the company can no longer regularly meet its present or future obligations, that is, when the company is insolvent.

Thus, when a company finds that its equity is less than half of its share capital, it must assess whether it is necessary to declare its insolvency. If this is the case, the company will need to request it from the Commercial Court. Once the relevant judge has admitted the request, understanding that the company is effectively in a situation of insolvency, the corresponding judicial proceeding will be opened. This court process will conclude either with a continuation or reorganization agreement with the company’s creditors or with the liquidation of the debtors’ assets.

If the insolvency situation is paired with the fact that the company lacks sufficient assets to meet its debts and, therefore, will not be able to reach the terms of the agreement with its creditors, it is possible to include the application for the company’s liquidation along with the application for the insolvency proceeding.

Dissolution and Liquidation Ordered by the Company

The liquidation of a company in the framework of insolvency proceeding differs from the orderly or extrajudicial dissolution and liquidation of the company. The latter may be agreed at any time by the General Shareholders’ Meeting if the company has sufficient liquidity or assets to satisfy all its debts.

However, directors of a company will have to request the dissolution of the company when:

• The activity or activities constituting the corporate purpose of the company have ceased (the cessation of activity will be considered as such after a period of inactivity of more than one year)
• By the conclusion of the task constituting the purpose of the company
• By manifest impossibility to achieve the social purpose
• By the paralysis of the corporate bodies in such a way as to make their functioning impossible
• When the company shows losses that reduce the equity to less than half of the share capital, unless the latter is sufficiently increased or reduced, and provided that it is not appropriate to request for insolvency
• By a reduction of the share capital below the legal minimum, other than through compliance with a law
• When the nominal value of shares without voting rights exceeds half the disbursed share capital and the proportion is not restored within two years
• For any other cause established in the statutes.

Under all these circumstances, the General Shareholders’ Meeting may adopt alternative measures to avoid the adoption of a company dissolution or liquidation agreement.

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If you need additional information about the insolvency proceeding or company liquidation in Spain,