11

Jan

2023

Directors’ liability: bankruptcy or dissolution

Directors' liability: bankruptcy or dissolution

We would like to inform you that it is essential to differentiate between the declaration of bankruptcy and the cause of dissolution of a company.

 

The declaration of insolvency must be made by the administrators within two months from the date on which the insolvency of the company becomes known and insolvency must be understood as the inability to comply with the obligations owed to creditors on a regular basis.

 

 

The law specifies that, if there is insolvency and also losses that reduce the net worth to half of the share capital, the administrators will not have to call a meeting to agree the dissolution if, within two months from the cause of dissolution (or, if applicable, from the acceptance of the position), they activate the insolvency mechanisms.

We would like to inform you that it is essential to differentiate between the declaration of insolvency proceedings and the cause for dissolution of a company.

The declaration of insolvency must be made by the administrators within two months from the date on which the insolvency of the company becomes known. Legally, insolvency must be understood as the inability to comply with the obligations owed to creditors on a regular basis.  Thus, when the administrator aware of the insolvency does not request the declaration of the insolvency situation within the two months following the knowledge of the insolvency, this can lead to a guilty insolvency.  

In addition to this declaration of guilty bankruptcy, the administrator is exposed to other consequences such as a possible judicial disqualification or even an eventual condemnation to cover the bankruptcy deficit. This last figure implies that the administrator assumes the responsibility of economic coverage of the existing differences between the value of the active mass of the inventory and the debts recognized in the list of creditors he covers the debts in the amount in which it is not enough to pay with the patrimony of the company.

On the other hand, there is the entry of the company in cause of dissolution. Its causes constitute a legal figure different and separate from insolvency and the declaration of bankruptcy. In the first place, it is not regulated by the Insolvency Law, but by the Capital Companies Law. This regulation establishes several legal causes by virtue of which the administrators of a company must summon the corporate bodies to request the dissolution of the company, the most like insolvency and that could occur simultaneously with it (although it does not have to be so) is the patrimonial imbalance. The equity imbalance occurs when the net worth of the company (the result of the subtraction between assets and liabilities) is less than half the value of the company’s capital stock. This does not always imply insolvency, since a company can be in a situation of net worth imbalance and be up to date with its creditors and vice versa, i.e., lack the liquidity to meet its obligations and, nevertheless, its net worth situation is positive.

When the administrator of the company detects the asset imbalance, he must call a general meeting within two months to adopt a dissolution resolution. If he fails to comply with this legal duty, the consequences are different and more serious than those set forth in the case of the non-declaration of insolvency proceedings. This is so, because the administrator is declared as jointly and severally liable for the debts of the company after the birth of the asset imbalance, consequently, the creditors will be able to claim indistinctly to the creditor or to the company the amounts owed to them by the latter.

As can be seen, these are different situations that do not necessarily coincide. However, it is also possible for this simultaneity to occur since a company whose net worth is so low may well find itself in a situation of insolvency and not be able to meet its obligations. In this case it will be necessary to consider whether there are debts, since if there are debts, it will be necessary to file for insolvency proceedings before dissolution, since dissolution is not possible. However, if dissolution is possible because there are more assets than liabilities, the most appropriate thing to do would be to proceed directly to dissolution.

In short, if insolvency and asset imbalance concur, the administrators must first manage the insolvency, requesting the declaration of insolvency proceedings, even if the liability for the non-dissolution seems more serious.

For further information, please consult Legal advice