Closing a limited company in Spain

INTRODUCTION

The process of closing a limited company in Spain consists of two phases. The first phase is called dissolution and the second liquidation. The objective of these two phases is the final closure of the company. It is important to understand that the beginning of the closure with the dissolution does not mean that the company is paralyzed, it simply enters a period (called the liquidation phase) in which the company has to dispose of the assets it has in order to proceed to the final closure. During this period, the company’s objective stops being that of obtaining profit and becomes the final closure.

CAUSES OF DISSOLUTION

There are several reasons why a limited company may be dissolved. It may be that the partners have decided to dissolve the company voluntarily, it may be that the cause is legally imposed for various reasons such as for example that the company had a certain duration and has passed the established date or for legal or statutory reasons. Let’s see each of them

Dissolution of full right

The so-called dissolution of full right occurs without the need of an agreement of the partners. The dissolution of full right is urged by the Mercantile Registrar or by any interested person.

For example, in the case of professional companies, there is an obligation to adapt the company to the law of professional companies. In the case that the company does not adapt to said law, the company is dissolved by law without the agreement of the partners.  

For legal or statutory reasons

In the case of dissolution due to legal or statutory reasons, an agreement of the partners is necessary to dissolve the company.

The possible causes of dissolution are:

1. The finalization of the corporate purpose of the company. This case occurs when the company has a very specific corporate purpose and has already been reached and terminated. It is not usually the most common causes of dissolution.
2. The impossibility of realizing the social purpose: occurs when in a company happens something that inescapably prevents carrying out the social purpose. An example could be that the company lost an administrative authorization that prevented it from continuing with its business.
3. The paralysis of the social bodies: in this case the lack of agreement between partners or the lack of a clear majority that prevents taking social agreements is what causes company to be dissolved.
4. The inactivity of the company: when a company is inactive in relation to the activities of its corporate purpose for more than a year its dissolution agreed.
5. Decapitalization: the reduction of social capital to less than half is the cause of the dissolution of company. This situation occurs as a result of the losses of company. The solution to this situation is the contribution of partners to company.
6. The voluntary reduction of social capital below the legal minimum. These cases occur, for example, when the general meeting decides to reduce the social capital and subsequently transform the company into a cooperative company or another type of company.
7. Social shares without vote: occurs when the nominal value of the shares without a vote exceeds half of the share capital and the proportion is not restored within two years.
8. Statutory causes: are causes for dissolution that can be decided freely in the bylaws by the partners.

Dissolution by agreement of the board

Finally, the will of the partners can be a cause for dissolution. In the same way that partners come together to create company, they can agree to its dissolution.

PROCEDURE

Once a cause for dissolution exists, a procedure must be followed (except in cases of full right dissolution) that begins with the adoption of the agreement by the general meeting of the company.

The general meeting must be convened within two months of the cause of dissolution.

At the general meeting, the decision to dissolve the company must be approved by a majority of the votes.

The resolution of the dissolution will be subsequently recorded in a public deed and registered in the Mercantile Registry corresponding to the company indicating the cause of dissolution, the dismissal of the administrators and the appointment of the liquidators who will be the persons in charge of the liquidation.

From this moment, the company must add the phrase “in liquidation” to its name.

REACTIVATION OF THE DISSOLVED COMPANY

In the event that a company that has entered into dissolution considers that the causes of dissolution have disappeared, the general meeting may agree on the reactivation of the company.

This procedure is not possible for companies whose cause of dissolution is a cause of full right.

LIQUIDATION

Introduction

Once the dissolution is finished, the liquidation phase begins. This phase is intended to liquidate, that is, sell the assets and pay the debts that the company has. If after this process there is still an asset in the company, it will be shared among the partners.

In this phase the company continues to exist as such, but its objective is no longer to obtain benefits but the purpose is to carry out everything necessary to liquidate the assets.

Finally, the Mercantile Registry will annul the company, leaving the company definitively extinguished.

Structure of the company during the liquidation

Administrators and liquidators

Once the liquidation process has been initiated, the administrators are dismissed from their positions and the liquidator (s) are appointed, who assume the responsibility from now on. The liquidator or liquidators may be a member or not, it may also be the person who was the administrator and there may even be a liquidation board with a minimum of three liquidators.

The appointment of the liquidator must be registered in the commercial register.

General board

The general board of the company continues to exist during the liquidation period and, therefore, may continue to take decisions although intended for the purpose of liquidation.

The general meeting may appoint and cease new liquidators, allow or not the liquidators’ actions, agree on the final distribution of the liquidation, etc.

Phases of the liquidation

Inventory and initial balance

Once the liquidation process has begun, the liquidator must prepare, within three months, an inventory and initial balance of the company.

Liquidation

The actual liquidation begins when the liquidator begins to sell the assets of the company, claims the debts owed to the company, pays the debts to the creditors, etc.

Final balance, liquidation share and distribution

Once the liquidation has reached its objective, that is, monetize the assets and debts of the company, the liquidator will prepare a final balance in which the real situation of the company will be shown and a project of division between the partners in which the resulting liquidation share will be shown .

The final balance must be approved by the general meeting.

The liquidation share is the value resulting from the participation of each partner in the company. This share is the amount that will be distributed to the partners proportionally to their participation in the company, unless the bylaws say otherwise.

Once the liquidation share has been determined, the remaining assets of the company are attributed to the partners in payment of their liquidation share, which may be in cash or not.

As a final step for the final closure of the company, the corresponding deed of extinction must be signed before a Notary and must be inscribed in the Mercantile Registry.

Simplified liquidation procedures

Dissolution-Liquidation

In some cases dissolution and liquidation can be agreed together. This is possible, for example, in companies that have not started activities and have assets made up solely of cash and there are no debts. It is also possible in companies that do not have equity or in companies that having equity reach an agreement for the distribution among the partners.

Global transfer of assets and liabilities

Finally, there is a simplified procedure that consists in transferring all the assets of the company to a third party in exchange for money or goods.

Once all the assets have been transferred, the company may be extinguished.