Liquidation of companies: The Final Balance
The closure of a limited or limited company can occur for multiple reasons, but in all cases we must follow a certain procedure in three steps: dissolution, liquidation and extinction.
In the following article, we will talk about the process of closing a company, focusing on the liquidation phase but more specifically on the Final Liquidation Balance that must be prepared by the liquidators of the company and approved by the general meeting of the same.
The final liquidation balance of a company
The first step is dissolution. The dissolution of a company supposes its legal disappearance, but it does not paralyze or put an end to its activity, since this will take place when the liquidation phase is over. This means that the dissolution opens the liquidation period, so the dissolved company will retain its legal personality while the liquidation is carried out, although the expression “in liquidation” must appear in its name so that its situation is known in legal transactions p>
The dissolution must be agreed by a simple majority in the Meeting and it must be for one of the reasons established in art. 363 of the Ley de Sociedades de Capital. Basically, these reasons would be:
- the cessation of the company’s activity for a period of more than one year.
- the conclusion of the corporate purpose of the company.
- the manifest impossibility of being able to achieve the corporate purpose.
- Losses that reduce the net worth to an amount less than half of the share capital, provided that the declaration of bankruptcy is not appropriate.
The Board can also adopt the resolution of dissolution as long as the partners so decide by absolute majority.
Liquidation phase of a company
Secondly, the liquidation phase begins. With the opening of the liquidation period, the company administrators will cease to hold office, extinguishing their power of representation of the company. Those dismissed will be replaced by the company liquidators who will assume the functions of the administrators and must ensure the integrity of the company’s assets until it is liquidated and distributed among the partners. Normally, the general meeting agrees that those who were previously administrators be liquidators, since they know the details of the company, although the general meeting is empowered to appoint those it deems appropriate and may be completely unrelated to the company.
This liquidation process will comprise the following phases:
- Prepare an inventory and balance sheet of the company.
- Approval of the final balance of the liquidation and asset distribution project.
- Distribution of social assets.
Preparation of the final liquidation balance sheet
We will focus on the preparation of the final liquidation balance.
Once the aforementioned inventory has been checked and completed, this final balance would be treated as a reopening accounting entry. The liquidators, in order to monetize the assets and rights that are part of the business assets, will be in charge of:
- Settle credits and debits.
- Delete ledger accounts that offset each other.
- Realize or convert the assets of the company.
- Record company liquidation expenses.
Once the company’s debts have been settled, the final balance will therefore consist of the company’s own funds and the assets resulting from the liquidation process.
Art. 390 of the Capital Companies Law establishes that:
“on completion of the liquidation operations, the liquidators will submit for the approval of the general meeting a final balance, a complete report of said operations and a division project between the partners of the resulting asset”.
Once the company’s liabilities have been paid and the net assets distributed among the partners, the liquidation will be considered completed.
Once the liquidation is completed, the entity will be canceled from the registry. In this phase, the company’s entries in the Mercantile Registry are cancelled.
It is the liquidators who are in charge of granting the public deed of extinction of the company and registering it in the Mercantile Registry. In the registration, the final balance of liquidation will be transcribed and the identity of the partners and the value of the liquidation quota that would have corresponded to each one of them will be recorded, and it will be stated that all the seats related to the company are cancelled, as well as the books and documents of the extinct company will be deposited.
It is evident that in order to carry out this process of dissolution, liquidation and extinction of a company, it is necessary that there are sufficient assets to cover the liabilities. Only in the case that this does not happen, the way to undertake is the bankruptcy since they will not be able to collect all of their credits against the company. In the liquidation balance it must be clearly reflected that the assets are more than enough to pay all the debts in their entire amount.
In conclusion, that the Final Settlement Balance:
1.- It is prepared by the liquidators of the company.
2.- It is prepared at the end of the liquidation phase once the monetization operations of the assets and rights of the company have been completed.
3.- It must be approved by the general meeting before being presented to the Mercantile Registry together with the proposal for the distribution of assets among the partners.