The Capital Companies Act (LSC) articles 363, 365 and 367 establish as cause for dissolution of corporations and limited liability companies when net equity results are reduced by losses below half of the share capital, unless the share capital is increased or reduced sufficiently, and provided that it is not appropriate to request a declaration of bankruptcy, and establishes a liability system of the directors towards the company’s debts for failing to initiate the dissolution of the company in time or promoting the necessary measures to resolve the cause of equity imbalance.
As a result of COVID-19 and for the fiscal years 2021 to 2022, the requirements for concurrence and applicability of the cause for dissolution based on losses, provided for in the LSC known as “corporate moratoriums”, were modified.
These corporate moratoriums (article 13 of Act 3/2020) established the temporary suspension, for the fiscal years 2020 to 2022, of dissolution causes of companies based on equity imbalance of their share capital and the liability regime for directors as follows:
- the losses for the fiscal years 2020 and 2021 shall not be taken into account in determining whether the company is in a state of dissolution due to losses and;
- the assessment of the existence of the cause for dissolution based on equity imbalance shall be made when determining the result for the fiscal year 2022.
During the aforementioned years the companies have not been bound to take corporate measures to remedy the losses of previous years and directors have not incurred in liability for the company’s debts as provided for in company law regulations.
On 31 December 2022 this corporate moratorium shall end for companies whose fiscal year coincides with the calendar year. Thus, directors shall have to analyze the 2022 fiscal year results and if at the closing fiscal year there are equity imbalance situations, they must call for a shareholders’ meeting within two months as of the closing fiscal year to either (i) dissolve the company or (ii) resolve a capital increase or reduction in order to establish the net equity. If the company is in a situation of insolvency, directors must take the measures provided for in the Insolvency Act, i.e., notify the court of the existence of negotiations with creditors to obtain a restructuring plan or file for insolvency proceedings.
From a tax point of view and pursuant to the provisions of the Corporate Income Tax Act (LIS), the dissolution due to losses of an entity that forms part of a tax group will automatically lead to the exclusion of that company from such group, unless, as permitted by art. 58.4 d) of the LIS, the company reverses its situation during the fiscal year in which the annual accounts are approved.
The information contained in this note should not in itself be considered as specific advice on the matter under discussion, but only as a first approach to the subject matter, and it is therefore advisable that the recipients of this note obtain professional advice on their specific case before taking specific measures or actions.