Article 363 of the Capital Companies Act (hereinafter ‘LSC’ – Ley de Sociedades de Capital) establishes that companies must be dissolved in the following instances:

  • due to the cease in the pursuit of the activity constituting the corporate object for at least one year,
  • due to the conclusion of the company which constitutes its corporate object,
  • due to the impossibility of fulfilling the corporate object,
  • due to the paralysation of the corporate organs,
  • due to losses which leave net worth at a level at below half of share capital.
  • due to a reduction in share capital to below the legal minimum.
  • because the nominal value of the participations or shares without a vote exceeds half of the paid-up share capital and is not re-established within the term of two years,
  • or for any other cause for dissolution set forth in the by laws.

Therefore, in the event of any of the above affecting a company, the shareholders or partners are obliged to agree the dissolution of the company through a decision of the general meeting, which must be summoned by the directors. Whenever the general meeting is not summoned, the directors must request the dissolution of the company by the courts (or insolvency proceedings where applicable), which is an obligation established by article 366 of the LSC. If said dissolution does not take place, article 367 of the LSC makes the directors jointly responsible for all events following the occurrence of the legal cause for dissolution.

Previously, directors were held accountable for events prior to and subsequent to the occurrence of the cause for dissolution (Act 19/2005) meaning that the courts could attenuate this responsibility if significant measures had been taken to mitigate the damage created towards third parties if the dissolution does not take place. Judgments of the Supreme Court of 20th November 2008, 1st June 2009 and 12th February 2010 may be cited as an example of court moderation regarding the responsibility of directors.

However, although the measures taken by the directors may be significant, the mitigation of the directors does not always follow, as established recently in the Supreme Court judgment 27/2017 of 18th January. In said judgment, the Supreme Court tried a matter which developed as follows:

  1. a company closed its fiscal year 2008 with losses, however, without net worth falling to half of share capital.
  2. Subsequently, at the end of 2009, said company contracted a debt of an elevated amount. Furthermore, it did not file its annual accounts for said fiscal year with the commercial registry, an interesting fact for the reason that shall be seen further on.
  3. At the beginning of 2010, said company presented a first proposal for a collective dismissal procedure (expediente de regulación de empleo – ERE). A little later it filed a collective dismissal procedure intended to terminate the employment relationship with all of its employees, which was approved in May 2010.
  4. Consequently, the company carried out the transfer of assets and liabilities, and corporate obligations amounting to 3 million Euro appeared in the public deed of transfer.

The creditor of the company formulated a lawsuit in the first instance against the company for responsibility against the directors, based upon the obligation of dissolution, as losses which left net worth reduced to a level below half of the company’s share capital had been produced. The court of the first instance deemed that there was not sufficient proof to assume that the company had fallen into a cause for dissolution in 2009, based upon the absence of the deposit of the company accounts in the financial year 2009.

The matter reached the Supreme Court, and the company filed an appeal on the understanding that, although the directors had not promoted the dissolution of the company, they had taken significant measures towards the improvement of the company’s financial situation, supporting their appeal in the aforementioned Supreme Court case law. The real question posed by the debtor company was based upon whether it was appropriate to cushion the responsibility of the directors, when the latter had not promoted the dissolution of the company, although they did carry out actions to alleviate the financial crisis and the consequences to third parties.

The Supreme Court did not consider that the measures taken by the company justified the omission of the obligation of dissolution when, furthermore, all of said measures were leading to the disappearance of the company. This mitigation however, as pointed out by the Supreme Court in its judgment, should only be applied under exceptional circumstances.

Hugo Ester

Vilá Abogados

For more information, please contact:

va@vila.es

7th April 2017