05 Jul DISSOLUTION, LIQUIDATION AND EXTINCTION

In the post of this week we are going to analyze three legal concepts of great importance in the business world: Dissolution, liquidation and extinction of a company

These are three completely differentiated phases of a process, which begins with the dissolution of the company, followed by its liquidation and will end with the extinction of the same. These are three completely differentiated phases of a process that begins with the dissolution of the company, followed by its liquidation and will end with the extinction of the same. All this implies that the dissolution of the company by itself will not automatically determine the extinction of its legal personality or the disappearance of the legal relation between the partners, nor the paralysis of the social activity, since the company continues to subsist with certain peculiarities , as for example the orientation of its activities not to the fulfillment of the social objective, but to the liquidation of its patrimony, and once concluded mentioned liquidation it is possible to get the extinction of the same one. With respect to the first of the phases (The dissolution), the Capital Companies Law (“LSC” hereinafter) distinguishes between three different types of causes of dissolution of companies:

• First of all, we have the automatic dissolution of the company, which operates automatically without the need for any agreement by the General Meeting.
• Secondly, the dissolution by legal or bylaws cause, which requires an agreement of the Meeting of Partners or a judicial decision.
• Third, we find those cases agreed by the general meeting, WITHOUT the need for any cause.

In addition, the same legal text includes two other specific cases: first, the judicial dissolution of the company at the request of any member, in case of verifying the will of its non-registration in the commercial registry, or in any case, wherein after a Year since the issue of a public deed of constitution before a Notary, its registration has not been requested.

 Second, the judicial declaration of nullity of the company, which will produce identical effects to the dissolution (both give rise to the liquidation)

Without wishing to expand on each of the causes mentioned, we would like to emphasize today’s post on the primary differences between those solutions that are automatically and those included in the law or bylaws.

As a general rule, in the cases of legal and bylaw causes, the concurrence of the same does not automatically produce the dissolution of the same, but only force the general meeting to make a decision in this respect: agree the dissolution of the same or proceed to adopt the necessary social agreements in order to resolve the original cause of the dissolution.  With this, the dissolution will only occur when the general meeting of the partners expressly agrees.

Who has the obligation to convene the meeting to dissolve in cases wherein take place a legal or bylaw cause? This duty falls on the figure of the administrator, who shall  convene the general meeting within a period of two months from the date when he cause is known or must be known, and if they do not comply with this obligation they will be jointly and severally liable for social obligations after the concurrence of the cause. (Articles 365 and 367 LSC).

Once agreed, what is the next step? The dissolution agreement shall be registered in the Mercantile Registry. The adoption of the dissolution agreement entails a series of effects, specifically the liquidation period is opened, a phase that we can define as the set of operations that, after the dissolution of a company, has as purpose the sale of the elements of the asset and the payment and fulfillment of the debts and social obligations, to proceed, subsequently to the distribution among the partners of the subsisting net assets

The opening of the liquidation period implies a series of effects and consequences:

(i) The company will retain its legal personality but it will take place a change of its corporate name   (it must add to its denomination the expression “in liquidation”) and in its corporate purpose, which becomes the liquidation of its assets.

(ii) In turn, as provided in art. 374 and 375 of the LSC, the administrators shall cease to hold office, the powers of attorney being extinguished and the liquidators of the company shall be appointed, who shall assume the functions established by the law, having to ensure the integrity of the social patrimony as long as it is not liquidated and distributed among the partners.

Once the company has been liquidated, it will take place its extinction. The LSC in its articles 395 to 397, establishes that the liquidators have the obligation to grant public deed of extinction and proceed to its inscription in the Mercantile Register and the company’s seats are canceled, thus producing the definitive extinction of the company.

Here arise the question of the million: does this extinction necessarily entail the loss of its legal personality and therefore the possibility of being prosecuted before a court even in the case wherein its extinction has taken place? In other words, could an extinguished company maintain its legal personality? The answer to it will be discussed in the post next week.

At Navarro Llima Abogados we have a team of highly qualified lawyers with experience in the law of the company. If you have any questions thereon, please do not hesitate to contact us.

Javier Navarro Lacambra

Corporate Lawyer