Dissolution and liquidation of companies

• The dissolution of a company occurs due to the expiry of the duration term stipulated in the articles of association, unless it has been duly extended and notified.
• Due to the passage of one year from the agreement to reduce the share capital below the legal minimum as a result of compliance with a law. This cause only applies when the transformation or dissolution of the company, or the capital increase to meet the legal minimum, has not been registered beforehand in the Mercantile Registry.

In this latter case, if one year passes without taking legal measures, the directors will be personally and jointly liable for the company's debts.

These causes of automatic dissolution operate automatically, without the need for a General Meeting agreement, and the Mercantile Registry must record the dissolution at the request of any interested party.

The legal and statutory causes for the dissolution of companies are as follows:

• The cessation of the activity defined as the corporate purpose (it is considered that cessation occurs automatically after a period of inactivity exceeding one year).
• The conclusion of the business that constitutes the specific purpose of the company.
• Impossibility of carrying out its corporate purpose.
• The paralysis of corporate bodies that make the functioning of the company practically impossible.
• Losses that reduce net assets to an amount less than half of the share capital or due to reduction of the share capital below the legal minimum, unless the capital is increased or reduced to avoid this cause of dissolution.
• Due to reduction of the company’s capital below the minimum amount required by law, provided that it does not result from compliance with a law.
• Due to reduction of the nominal value of non-voting shares or non-voting stock exceeding half of the share capital (if this situation is not restored within two years).
• For other causes established in the company’s statutes.

Dissolution for legal or statutory cause does not occur automatically, but requires an agreement of the Shareholders' Meeting or a resolution of a Judge decreeing the dissolution. In the case of dissolution derived from a Shareholders' Meeting agreement, it will be necessary to process a deed of dissolution and liquidation of the company before a notary.

The judicial dissolution of a company may occur by court order, when there is a legal or statutory cause for dissolution and the partners do not reach an agreement. In such a case, any of the partners may apply to the Judge to decree the dissolution of the company.

However, you should be aware that if the partners agree, the procedure will be simpler and cheaper, as instead of undergoing a lengthy judicial process, it will suffice for the liquidator of the company to sign a deed at the notary's office.

Furthermore, you should know that nowadays the deeds of dissolution and liquidation of companies, in case of agreement among the partners, can be signed in person by attending our notary office on Avenida Diagonal in Barcelona, or completely digitally by signing via videoconference with one of the notaries of JLA Notarios, from wherever you wish.

This is the most common reason for proceeding with the dissolution of a company, by the simple agreement of the interested parties. In the case of limited liability companies, it will be agreed according to the ordinary majority established in the Revised Text of the Capital Companies Act. That is, by the majority of the votes of the partners present at the Meeting, provided they represent at least one third of the votes corresponding to the shares into which the share capital is divided.

Regarding the requirements for constituting the Meeting that agrees the dissolution, you should know that there is no quorum for constituting that Meeting, except in Public Limited Companies, which we will see later. However, after the shareholders' meeting that agrees to dissolve a company, it will be necessary to formalise the deed of dissolution of the commercial company before a notary.

Regarding public limited companies, at the first meeting, the shareholders' meeting must represent at least 25% of the subscribed capital with voting rights. At the second meeting, there is no quorum requirement.

As for the adoption of a resolution to dissolve a public limited company, a simple majority vote of the shareholders present is sufficient.

The effects of the dissolution of a company are common to all types of companies. Basically, the effect of the dissolution of a company is that the liquidation period of the company begins, as established by company law.

After the dissolution, the company will retain its legal personality while the liquidation is carried out and must add the expression "in liquidation" to its name. Furthermore, the corporate purpose will no longer be that stated in the articles of association but the liquidation of the company itself.

On the other hand, the directors of the entity will cease their duties and liquidators will be appointed, who may or may not be the same as the previous directors, and whose main function is to carry out the new corporate purpose: the liquidation.

As for the effects of the dissolution vis-à-vis third parties, the dissolution will not have effects against third parties until it is registered in the Commercial Registry.

Yes, a company that has been dissolved and before carrying out the liquidation, can be reactivated and continue its activity, but several requirements are necessary for this:

• There must be an unequivocal will to reactivate the company and continue with the activity.
• The legal or statutory cause that motivated the dissolution must have disappeared.
• The cause of dissolution must not operate automatically, unless there is new consent. There are causes of automatic dissolution, such as having reached the term of the company's duration, but nothing prevents it from being reactivated if new consent is given, as indicated by the Resolution of the DGRN of 9 June 2014.
• The accounting assets must not be less than the share capital.
• The payment of the liquidation quota must not have begun. The liquidation process may have started, with the approval of the final balance sheet, payment to creditors, etc., but the distribution of the company's assets among the partners cannot have begun at the time the company is reactivated.

The central idea is that the liquidator has the power of representation of the company for all necessary actions for the liquidation, as the liquidation is the new corporate purpose. The entire procedure is regulated in the Revised Text of the Capital Companies Act.

Thus, the liquidator will inventory the company and create a balance sheet on the day of dissolution, collect social credits, pay debts contracted with third parties, those existing between partners or shareholders and third parties who were part of the business sphere or, finally, those of the company with partners or shareholders. On the other hand, they will carry out accounting management, sell assets, and meet with the partners' meeting to explain how the liquidation is taking place according to the legislation and what is established in the company's statutory rules.

Once the debts have been settled and the creditors paid or the deposit of their credits made in accordance with the law, the final balance sheet will be submitted for approval at the General Meeting. The documents with the transactions carried out, reflecting each partner's liquidation quota and the division among the partners or shareholders of the resulting assets, must also be presented for review. Finally, the liquidator must distribute what remains of the company’s assets among the partners.

As we have explained previously, to proceed with the dissolution and liquidation of a company, a final liquidation balance sheet is required, showing the accounting assets and liabilities. Based on this balance sheet, a distribution of the assets, rights, and capital remaining in the company must be carried out, making this distribution in proportion to each partner's share in the company, with this distribution being recorded in the liquidation deed.

The liquidation of a company will be subject to the ITPAJD tax, in its corporate operation modality. The regulation of this tax is set out in the Royal Legislative Decree 1/1993, of 24 September, specifically in articles 19 and following. Corporate Operations tax will only be paid when, in the liquidation, the partners of the company being dissolved receive a liquidation quota. If the partners receive nothing in the dissolution of the company, no tax will be payable.

In this regard, article 19 states that “subject corporate operations are: 1st The incorporation of companies, the increase and decrease of their share capital, and the dissolution of companies,” with the taxable base being the sum of the assets and rights delivered to each partner. Likewise, article 25 states that “in the dissolution, the taxable base will coincide with the value of the assets and rights delivered to the partners, without deduction of expenses and debts, determined in accordance with the provisions of article 10 of this consolidated text.”

But, who must pay the corporate operations tax in a company dissolution and liquidation? According to articles 23 and 24 of the aforementioned Royal Decree, it will be, firstly, each of the partners in proportion to the assets and rights received; secondly, and subsidiarily, “the promoters, administrators, or liquidators of the same who have intervened in the legal act subject to the tax, provided they have taken charge of the contributed capital or have delivered the assets.”

The tax rate for corporate transactions is 1%, according to article 26, without prejudice to the fact that the Autonomous Communities may have set a different percentage. For example, in Catalonia, Valencia or Madrid, the rate is 1%. As we have said, shareholders will only pay corporate transaction tax in the case of receiving liquidation quotas.

When the partner is an individual, there may be a capital gain or loss, due to the difference between the amount contributed at the time and the value of the assets or rights to be received at the time of liquidation. This is set out in the IRPF Law, Law 35/2006, of 28 November which states that "in cases of separation of partners or dissolution of companies, a capital gain or loss will be considered, without prejudice to those corresponding to the company, the difference between the value of the social liquidation quota or the market value of the assets received and the acquisition value of the title or capital participation corresponding."

This capital gain or loss, according to article 46, is included in the savings tax base, in the income tax return corresponding to the year in which the liquidation took place and is taxed according to the following table:

Similarly to what happens with individuals, legal entities or companies may obtain a capital gain or loss from the difference in value between the value of the share reflected in the company’s balance sheet and the amount received at the time of liquidation, paying tax in this case under the Corporate Tax at the time of their annual liquidation.

However, it should be taken into account that the book value of the share may be different from its tax value, for example, because it has been impaired in accounting terms; in this case, the necessary extra-accounting adjustments must be made when paying Corporate Tax, in accordance with article 13 of the Law 27/2014, of 27 November, on Corporate Tax.

Finally, there may be exempt capital gains and deductible negative income when the company being liquidated is a subsidiary entity; in this way, article 21.8 of the aforementioned law states that “negative income generated in the event of the extinction of the participated entity shall be fiscally deductible, unless it is the result of a restructuring operation”, provided that the requirements of article 21 itself are met, namely:

• That the percentage of participation, direct or indirect, in the capital or equity of the entity is at least 5%.
• The corresponding participation must have been held continuously during the year prior to the day on which the benefit to be distributed becomes payable.
• In the case of participations in the capital or equity of entities not resident in Spanish territory, that the participated entity has been subject to and not exempt from a foreign tax of an identical or analogous nature to this Tax at a nominal rate of at least 10% in the fiscal year in which the profits being distributed were obtained.

The last tax is only applicable in cases where a property is awarded in the liquidation. In these cases, since there is a transfer of a property, the municipal capital gains tax must be settled within 30 days from the granting of the deed at the Town Hall where the property is located, with the taxable person being the liquidated company, as the transferor, according to article 106 of Royal Legislative Decree 2/2004, of 5 March, Law Regulating Local Finances.