Covid-19, dissolution due to losses and directors' liability
Published on 16th Jul 2020
The extraordinary regulatory provisions published on the companies' dissolution regime in light of the crisis caused by Covid-19 are oriented to allow companies to gain time to restructure their debt, obtain liquidity and offset losses, either through the recovery of their ordinary activity or through access to credit or public aid.
Applicable regime pre-Covid-19
The cause of dissolution
Pursuant to the Spanish Capital Companies Law, one of the legal causes of dissolution occurs when losses reduce a company's net equity to an amount of less than half of its share capital, unless the latter is sufficiently increased or reduced, and provided that it is not appropriate to file for bankruptcy proceedings.
Once the asset imbalance has occurred, the directors have a period of two months from the time they become aware of it to convene the general meeting in order to adopt:
- the resolution of dissolving the company,
- such resolutions as may be necessary for the removal of the cause for dissolution, or
- if the company is insolvent, the resolution of initiating bankruptcy proceedings.
On another note, in the event that the general meeting called is not held, does not resolve to dissolve the company or does not adopt the appropriate measures to re-establish the balance of the assets, the directors also have a period of two months to file the judicial dissolution of the company or, if appropriate, the initiation of the company's bankruptcy proceedings starting from:
- the date on which the meeting is to be held, if the meeting has not been held, or
- from the day on which it is held but the relevant resolution has not been adopted.
Directors who fail to comply with the obligations described above regarding the obligation to call a general meeting or to file the judicial dissolution of the company or the initiation of the company's bankruptcy proceedings will be considered jointly and severally liable for the company's obligations subsequent to the occurrence of the legal cause for dissolution.
In these cases, the corporate obligations claimed will be presumed to be dated after the occurrence of the legal cause for the dissolution of the company, unless the directors prove that they are of a prior date.
Measures to facilitate the survival of companies
By virtue of Royal Decree Law 8/2020 of 17 March on urgent extraordinary measures to deal with the economic and social impact of COVID-19, the two-month period available to directors to call a general shareholder meeting was suspended for cases in which legal or statutory cause for dissolution of companies occurred before and during the declaration of the state of alarm (i.e. until 21 June). Furthermore, the Royal Decree has introduced the exoneration of liability for administrators from corporate debts incurred during the state of alarm in the event that the legal or statutory cause for dissolution had occurred during the validity of said state of alarm.
Furthermore, Royal Decree Law 16/2020 of 28 April on procedural and organisational measures to deal with COVID-19 in the Administration of Justice field, which seeks to temporarily and exceptionally mitigate the consequences that the application of the general pre-Covid-19 rules would have on these companies and their directors, has made possible and promoted, on the one hand, the delay in filing for bankruptcy proceedings until 2021 (for more information, see, Novelties in the procedural and bankruptcy field introduced by RD Law 16/2020 on procedural and organisational measures to deal with COVID-19 in the Administration of Justice field) and, on the other hand, dissolution due to losses until 2022.
Indeed, by virtue of the aforementioned Royal Decree, companies shall not take into consideration the losses of the financial year 2020 for the purpose of determining the cause of dissolution due to losses so that, if the results of the financial year 2021 show losses that reduce the net equity to an amount less than half of the share capital, the directors will have a period of two months, counting from the end of said financial year, to call the general meeting to proceed with the dissolution of the company or to enervate the cause of dissolution.