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

Faced with the economic catastrophe that has been experienced worldwide as a result of COVID-19, many entrepreneurs have decided to keep their business active even though they are aware of their lack of liquidity and the increase in debts. But have they asked themselves the question of whether the dissolution and liquidation of their company could avoid major problems in the long run?

To do this, first of all, we must clarify the reasons why a company can be dissolved. In accordance with Royal Legislative Decree 1/2010, of July 2, which approves the consolidated text of the Capital Companies Act, a company can only be dissolved for the following reasons:

1. For the cessation of the exercise of the activity or activities that constitute the corporate purpose. Exactly, when you have been without providing any type of service for at least a year.
2. Because the purpose for which society was created has ended.
3. Because it is impossible to achieve the social purpose for which the company intended.
4. Because of the paralysis of the social organs so that they cannot function.
5. For losses that reduce net worth to an amount less than half of the share capital, unless it is increased or reduced to a sufficient extent, and provided that it is not appropriate to request a bankruptcy declaration.
6. For the reduction of share capital below the legal minimum, which is not a consequence of compliance with a law.
7. Because the nominal value of non-voting shares or non-voting shares exceeded half of the disbursed share capital and the proportion was 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.

Once we have clarified the reasons why a company may dissolve, we will proceed to develop what would be the phases that a company must go through to carry out an orderly closure and avoid significant consequences.

Three phases are necessary to carry out an organized closing, which in many cases are similar to those of an insolvency closure. A detail to keep in mind, and which is sometimes not considered by the people who carry out the dissolution, is that, in addition to complying with the regulations, the company's bylaws must be respected. For this reason, it is important, as we have been commenting since the beginning of these newsletters, to be advised at all times by professionals who know the dissolution procedure, in order to have absolute control of the possible consequences that such closure may entail.

1. Dissolution phase

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

2. Liquidation phase

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

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

3. Extinction phase

Once the two-month challenge deadline has passed, the company is terminated. Once again, by granting a public decree, it releases the final liquidation balance sheet, the approval agreement, the declaration of payment to creditors and the division of assets between the partners.

After that, the registration entries may be canceled and the cancellation of the Treasury, Social Security and other public records may be processed, which is conditioned on the activity that is carried out and carried out in State, regional and municipal administrations, authorities or sectoral registries.

The fact is that there are many details to take into account if you decide to dissolve the company, one of them being the taxes that must be liquidated to dissolve the company, these being Corporation Tax, VAT, personal income tax, for the transfer of capital to the shareholder's assets, as well as the Tax on Property Transfers and Legal Acts, which applies to the calculation of the total value of assets and rights a rate of 1% taxed as a Corporate Transaction.

Another issue to take into consideration is the fact that society is responsible for workers. If the company decides to close, for example, because of the losses that have been generated, workers are entitled to compensation of 20 days per working year, and with a maximum of twelve monthly payments.

If the losses are justified and do not allow them to face workers' compensation, they must go to FOGASA, that is, the Social Guarantee Fund, which is responsible for guaranteeing workers the collection of salaries and compensation in the event of problems in the termination of their contracts with companies that have resulted in losses and have closed.

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

However, it is necessary to know that a company without commercial activity maintains its fiscal and commercial obligations in force throughout its existence, including the expense involved in complying with them, without there being any income on the part of the company.

In any case, it is as important to know how to constitute a company as to carry out an orderly closure to avoid greater consequences, because there is a great stigma in the issue of closing a company, seeing it as a failure but in a way, it 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 closing a company in an orderly manner as an alternative, and for this it is necessary to be in good hands and to be advised so as not to lose sight of every detail of this last corporate transaction. At Tourism and Law, we offer you that help to comply with regulatory requirements and achieve relative success in closing your company to turn this bad drink into something positive.

Pilar Mata (T&L Attorney)