Dissolving the company: an alternative to consider in times of Covid-19

In the face of the global economic hecatomb caused by COVID-19, many entrepreneurs have decided to keep their businesses active even though they are aware of their lack of liquidity and increasing debts. But have they asked themselves whether the dissolution and liquidation of their company could avoid greater problems in the long run?

To do so, first of all, we must clarify the reasons for which a company can be dissolved. According to the Royal Legislative Decree 1/2010, of July 2, which approves the revised text of the Capital Companies Act, a company can only be dissolved for the following reasons:

1. For the cessation in the exercise of the activity or activities that constitute the corporate purpose. Exactly, when it has been at least one year without rendering any type of service.
2. Because the purpose for which the company was created has ended.
3. Because it is impossible to achieve the social purpose for which the company was proposed.
4. By paralyzing the corporate bodies in such a way as to make it impossible for them to function.
5. For losses that reduce the net worth to an amount less than half of the capital stock, unless the latter is increased or reduced to a sufficient extent, and provided that it is not appropriate to request a declaration of bankruptcy.
6. For reduction of the capital stock below the legal minimum, which is not a consequence of compliance with a law.
7. Because the nominal value of the non-voting or non-voting shares exceeds half of the paid-up capital stock and the ratio is not restored within two years.

In other words, and by way of summary, a company can be liquidated if it is inactive, if the purpose for which it was created cannot be fulfilled or if there are serious losses.

Having clarified the reasons for which a company can be dissolved, we will proceed to develop the phases through which a company must pass in order to carry out an orderly closing and avoid significant consequences.

Three phases are necessary to carry out an organized closing, which in many cases are similar to those of a closing due to insolvency. A detail to take into account, and that sometimes is not considered by the people who carry out the dissolution, is that, in addition to complying with the regulations, the bylaws of the company must be respected. Therefore, it is important, as we have been saying since the beginning of this newsletter, to be advised at all times by professionals who are familiar with the dissolution procedure, in order to have full control of the possible consequences that may result from such a closure.

1. Dissolution phase

In a first phase, the dissolution of the company is voted at the General Meeting of Shareholders. From that moment on, the company's corporate name changes to direct its activity towards liquidation, so that all business decisions taken must have liquidation as the sole purpose. The agreement must be notarized and registered in the Commercial Registry of the province in which it is registered.

2. Liquidation phase

Similarly, the liquidators will be appointed, who, when it is not a bankruptcy proceeding, may be the administrators themselves, being registered in the Mercantile Registry.

The main objective of the liquidators is the distribution among all the partners of the resulting assets, once the outstanding credits have been settled and all the debts have been satisfied. Specifically, they are in charge of the drafting of the inventory and balance sheet, liquidation of the credits and debts and finally drafting of the final balance sheet of the liquidation, which is presented at the General Meeting together with the project of division of the remaining assets. It must be approved by majority, and there is a two-month term to be challenged in the case of disagreement of any of the partners.

3. Extinguishing phase

Once the two months of the challenge period have elapsed, the extinction of the company is carried out. Again, by means of a public deed, the final liquidation balance sheet, the approval agreement, the declaration of payment to the creditors and the division of the assets among the partners are made public.

After this, the registry entries may be cancelled and the cancellation may be processed in the Tax Authorities, Social Security and other public registries, which is conditioned to the activity that is developed and carried out in State, Autonomous Community and Municipal Administrations, authorities or sectorial registries.

There are many details to take into account in the event of deciding to dissolve the company, one of them being the taxes that have to be paid in order to dissolve the company, these being the Corporate Tax, VAT, Personal Income Tax, in the case of the transfer of capital to the partner's assets, as well as the Tax on Capital Transfers and Legal Acts which is applied to the computation of the total value of the assets and rights at a rate of 1%, taxed as a Corporate Transaction.

Another issue to take into consideration is the fact that the company has employees in its charge. If the company decides to close, for example, due to the losses that have been generated, the workers are entitled to a severance payment of 20 days per year of work, with a maximum of twelve monthly payments.

If the losses are justified and do not allow to face the indemnifications of the workers, these will have to resort to FOGASA, that is to say, the Social Guarantee Fund, which is in charge of guaranteeing to workers, the collection of salaries and indemnifications before problems in the extinction of their contracts with the companies that have turned out to have losses and have closed down.

Another alternative would be to keep the company inactive, regardless of the debts, with the intention of recovering the company in the face of market improvement expectations or because the option to sell the company arises.

However, it is necessary to know that a company with no commercial activity maintains its tax and mercantile obligations during its entire existence, including the expenses involved in complying with them, without any income on the part of the company.

In any case, it is as important to know how to incorporate a company as it is to carry out an orderly closing to avoid major consequences, and there is a great stigma in the matter of closing a company, seeing it as a failure but in a way, this is a mistake, since if it is not managed correctly, its consequences could multiply when trying to keep it open. It is a matter of understanding that in many cases, the dissolution of the company is a better decision to complete the last stage of the business cycle.

In short, it is necessary to consider as an alternative to close a company in an orderly manner, and for this it is necessary to be in good hands and be advised not to lose sight of every detail of this last corporate operation. From Tourism and Law we offer you that help to comply with regulatory requirements and achieve a relative success in the closure of your company to turn this ordeal into something positive.

Pilar Mata (Lawyer T&L)