Imbalance of Assets and Liabilities: cause for dissolution of a commercial company

It is a cause of dissolution of a mercantile company, among others, the one in which due to the losses the Net Worth is reduced to an amount lower than half of the Equity of the company.

We would be before the obligation to dissolve the mercantile, and not to do it in the term of two months since this situation is known brings serious consequences, especially the joint and several responsibility of the administrators of the debts that the company contracts since this cause of dissolution exists.

Cause of dissolution: Net Worth < 50% Equity

· What is meant by Equity?

The Net Equity constitutes the residual part of the assets of the company, after deducting all its liabilities. It includes the contributions made, either at the time of its incorporation or at a later date, by its partners, which are not considered liabilities, as well as the accumulated results or other variations that affect it.

· How do we get out of the situation of compulsory dissolution?

Article 363.1.e) of 363.1.e) of “Ley 1/2010, de 2 de julio, de Sociedades de Capital”, establishes that the reduction of equity as a result of losses that result in the value of such equity being less than half of the Equity is a cause for dissolution, unless the latter is increased or reduced to a sufficient extent, and provided that it is not appropriate to request a declaration of insolvency.

In these cases, as indicated in Article 365 of the Spanish Corporations Law, the directors must call a general meeting within two months of becoming aware of the situation in order to adopt a resolution to dissolve the company or, if it is insolvent, to file for insolvency proceedings. In addition, any shareholder may request the administrators to call the meeting if, in its opinion, there is any cause for dissolution or the company is insolvent.

· What are the consequences?

It is important to point out the liability of the administrators when the circumstances indicated above occur, since they will be jointly and severally liable for those corporate obligations subsequent to the occurrence of the legal cause of dissolution when they fail to comply with the obligation to call a general meeting within two months from the time they become aware of the asset imbalance. This is so, unless the administrators can prove that they are from an earlier date.

· How to get out of this cause of compulsory dissolution?

Now then, the company can redirect this situation with any of the following actions:

• By means of a capital increase.
• By means of a capital reduction.
• By means of a capital increase and reduction (“accordion operation”).
• By means of a participating loan.
• By means of contributions from shareholders.

Perhaps the last of the solutions is the declaration of the insolvency proceedings, in any case, before taking any decision about which action to adopt, it would be necessary to analyze exhaustively the balance sheet of the company, the pending obligations, the contracts to fulfill, the accounting presented and many other details because, depending on one or the other, it would be necessary to make economic disbursements or not. The exit could also have a cost because there would be fees for the Commercial Registry, Notaries, minutes of shareholders’ meetings to be prepared and meetings to be held in order to make the appropriate decisions.

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