liquidate a company What is and how to liquidate a commercial company

What is a company?

If we had to define what a company is in a simple, clear and not so technical way, we could take into account the definition of the economist Sanchez Galán:

“A company is an organization of people and resources that seek to achieve an economic benefit with the development of a particular activity. This productive unit can have a single person, or several, and must seek profit and achieve a series of objectives set in its training”

The constitution and, above all, the subsequent management of a company require certain economic and human resources. Unfortunately, sometimes the business does not bear the expected results. After the pandemic that we have experienced as a result of COVID-19, the situation has complicated the business landscape, leading to the closure of many companies.

We must know that closing a company does not only consist of lowering the blind of our business but also requires a series of legal procedures of greater or lesser complexity that are required for the administrator to do not incur civil and even criminal liabilities. In addition, there are multiple alternatives when it comes to closing a company, so we must look for the one that best suits our needs and circumstances. We will proceed below to explain what are the procedures to close a company, depending on the circumstances in which it is found.

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Commercial Liquidation

Resolution of dissolution of the general meeting

The administrator of the company can call the General Meeting of the company to inform all partners of the current situation of the company, so that they can vote on the agreement dissolution of the company if any of the causes provided for in art. 363 of the Companies Law of Capital. However, if the company is in a situation of insolvency, the appropriate thing will be to go to bankruptcy since, with debts that cannot be met, the company cannot be liquidated (although it can be dissolved) and the company administrators could incur in responsibility.

The most common legal cause for dissolution of those provided for in the aforementioned art. 363 of the Capital Companies Law is the reduction of the net worth of the company below half of the share capital, and the administrator must call a General Meeting for the adoption of the resolution of dissolution of the company, otherwise, any interested party may request the dissolution before the commercial judge of the company’s registered office as indicated in article 366 of the Capital Companies Law. In these cases, the administrators may incur liability for not having complied with their legal requirements, responding jointly and severally with their assets in respect of company debts.

It is true that the Law provides that the company that agreed to its dissolution can “return to life” and resume its activity complying with the requirements indicated in article 370 of the Law on Capital Companies, that is,

“…provided that the cause for dissolution has disappeared, the book equity is not less than the share capital and the payment of the liquidation fee to the partners has not begun. Reactivation cannot be agreed upon in cases of full dissolution.”

Liquidation opening

With the approval of the dissolution of the company, the liquidation period begins. During this period, the company will continue to retain its legal personality, but must add the phrase “in liquidation” to its name (article 371 of the Capital Companies Act).

As of this moment, the administrators cease, and the liquidators will be appointed. If no other appointment is established by the Board and it is not prohibited by the Bylaws, the same people who acted as administrators will become liquidators, and, in principle, as established by law, they will be so for an indefinite period of time. However, in cases in which the dissolution was a consequence of the opening of the liquidation phase of the company in bankruptcy, the appointment of liquidators will not proceed, as stated in article 376 of the Law on Capital Companies, given that such charge will fall on the previously designated Bankruptcy Administration.

Regarding the accounts of the company, within a period not exceeding three months from the opening of the liquidation, the liquidators must prepare an inventory and a balance of the company with reference to the day on which it was dissolved. If the liquidation is prolonged for a period longer than that foreseen for the approval of the annual accounts, the liquidators will have to submit to the General Meeting, within the first six months of each financial year, an annual statement of accounts and a detailed report that allow accurately assess the situation of the company and the progress of the liquidation.

The liquidation process can last many months, due to the fact that the pending operations must be closed and, where appropriate, start the new operations that are necessary for the liquidation. Likewise, at the end of the liquidation, a final balance will also be made, which will be accompanied by a complete report of the operations and a project of division of the resulting assets between the partners.

Once the liquidation operations have been concluded, the liquidators will submit a final balance sheet, a complete report on said operations and a division project among the partners of the resulting assets for the approval of the General Meeting . The approving agreement may be challenged by the partners who have not voted in favor of it within a period of two months from the date of its adoption.

The positive liquidation fee that results, if any, will be delivered to each partner in proportion to their participation in social capital. In any case, division operations will be carried out in accordance with the provisions of the bylaws or, failing that, as established by the General Meeting.

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Contest of Creditors

Bankruptcy, formerly called bankruptcy or suspension of payments, is a judicial proceeding that a company can take advantage of when it is unable to meet the payment of its obligations, such as payroll, social security, providers etc. Notwithstanding the situations that make it necessary to go to bankruptcy, this route is the one indicated to avoid the increase in debts that foreseeably cannot be paid, and in turn avoid administrators’ responsibilities in relation to said debts.

The bankruptcy is constituted as a mechanism subject to judicial intervention in which a Bankruptcy Administration is appointed that intervenes the faculties of the administrators or, where appropriate, the replaces. This judicial procedure admits different solutions:

• Creditor agreement.
• Liquidation, either unitary (through the disposal of the going concern) or fragmented (through the fragmented disposal of the debtor’s assets).
• Removal of insolvency status (for example, by simple payment or refinancing).

More information on this can be found in previous articles, such as: Dissolve a company with debts or Phases of a bankruptcy contest.

Finally, mention that the legitimacy to request this declaration of bankruptcy is held by the administrative body, or, where appropriate, any creditor, unless it had acquired the credit for acts inter vivos and individually, after their expiration, as indicated in article 3 of the Bankruptcy Law.

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Departamento de Derecho Mercantil

26/10/2021