What Does “Legal Cause for Dissolution” Mean?
Under the Spanish Companies Act (Ley de Sociedades de Capital, LSC), a company must be dissolved when certain legal circumstances make its continued operation impossible. It is not a sanction, but a statutory consequence.
According to Article 363 of the LSC, a company must dissolve when:
- Its corporate purpose has been fulfilled or is impossible to achieve.
- Its governing bodies are paralysed.
- Its net equity falls below half of its share capital.
In practice, this last situation — losses reducing net equity below 50% of the share capital — is by far the most common.
Directors’ Obligations When Facing Dissolution Grounds
When a company enters into a legal cause for dissolution, the law requires the directors to call a general meeting within two months from the date on which the cause was known or should have been known. The purpose is for shareholders to adopt measures to restore the company’s equity balance.
The purpose is to let shareholders decide how to restore the company’s equity balance.
Failure to comply can expose directors to personal and unlimited liability for the following company debts.
Legal Alternatives to Avoid Company Dissolution
The Spanish Companies Act provides several mechanisms to prevent dissolution and restore the company’s financial balance. The most common include:
Share Capital Increase
Shareholders may inject new funds or reserves to restore equity, a fast and effective measure.
Capital Reduction to Offset Losses
This operation adjusts the share capital to the company’s actual equity situation, eliminating accounting losses without dissolving the entity. It does not involve any cash outflow but must be approved by the general meeting and published.
Accordion” Operations (Simultaneous Capital Reduction and Increase)
A usual accounting restructuring technique that maintains business operations by reducing capital to offset losses and immediately increasing it to provide new resources.
Corporate Conversion or Transformation
Changing the company’s legal form (e.g., from an S.L. to an S.A.) may facilitate new investors or improve the financial structure. It is often a strategic move in restructuring processes.
Shareholder Contributions Without a Formal Capital Increase
Shareholders may provide participative loans or non-refundable contributions that strengthen net equity without modifying share capital. These are flexible and quick solutions.
In any case, if the company has already agreed to dissolve but has not yet completed liquidation, it may be reactivated provided that the cause for dissolution has disappeared (Article 370 LSC). This resolution must be adopted by a reinforced majority and executed in a public deed.
Prevention Is the Best Strategy
Early detection of financial imbalance is key to avoiding dissolution. Regular monitoring of annual accounts, solvency ratios, and capitalisation levels helps anticipate risks.
Specialised legal and accounting advice is often decisive in safeguarding a company’s continuity.
Frequently Asked Questions
It is the situation established by law that obliges a company to dissolve due to causes such as serious losses, paralysis of its corporate bodies, or the impossibility of fulfilling its corporate purpose.
Two months from the moment they become aware, or should have become aware, of the cause. If they fail to call a general meeting or to initiate the dissolution process, they may be held personally liable.
Through a capital increase or reduction, shareholder contributions, “accordion” operations, or changes in the company’s legal form, depending on its financial situation.
Yes, provided that the cause of dissolution has disappeared and the liquidation has not yet been completed, in accordance with Article 370 of the Spanish Companies Act (LSC).
If you are concerned that your company may be at risk of dissolution,
