The difference between dissolution and bankruptcy proceedings in commercial businesses.
I Dissolution:
This is a situation whereby a commercial business no longer has the legal capability to fulfill the purposes for which it was originally created and its survival is merely to resolve any ties established between the company itself and third parties.
The fact that there is cause for dissolution does not mean the sudden ending of the business. However it is the start of the dissolution procedure which will end in liquidation. The company will keep its legal status for the purpose of liquidation.
The aim of dissolution and liquidation is for a company to withdraw correctly from the market. This procedure can be completed under the protection of the General Companies Act.
The causes for the dissolution of limited companies are outlined in article 104 of the Limited Liability Companies Act of the 23rd March, 1995 (LSRL) and are almost identical to the causes for dissolution of public limited companies, according to article 260 of its regulatory Act. The causes are as follows:
1. Having completed the fixed term laid out in the statutes, in accordance with article 107.
2. As agreed by the General Meeting with the requirements and the majority necessary for the modification of the statutes.
3. For the closure of the company due to the impossibility to fulfill its business objectives or the cessation of the governing bodies of the company which makes the function of the company impossible.
4. For lack of business activity, of that which constitutes the business objective of the company, during a three year period.
5. As a consequence of losses which reduce the net wealth to an amount which is less than half of the social capital, unless the latter increases or decreases by the amount necessary and as long as the statement of insolvency is requested in accordance with the Act 22/2003 of the 9th July, regarding insolvency.
6. If the social capital falls below the legal minimum. When this drop is a result of non-compliance with the law, it will be subject to Article 108.
7. For any other cause outlined in the statutes.
Bankruptcy Proceedings:
The assumed aim of bankruptcy proceedings is insolvency, which is a situation in which the debtor finds himself when he can no longer regularly fulfill his obligations or the company debtor’s wealth is insufficient to meet the requirements of all his creditors. If the debtor himself submits the request, it is called a voluntary procedure, whereby he must show proof of the level of his debt and his insolvency, be it current or impending. If the request is submitted by a creditor, it is referred to as compulsory proceedings and must be based on legal facts.
A statement of bankruptcy does not represent a cause for the dissolution of the company, although the company in question may voluntarily agree to the dissolution or to the some of the causes for the dissolution. Therefore, although the bankruptcy proceedings do not automatically imply the dissolution of the company, the duty remains to dissolve it if at the moment of requesting the proceedings there is some other legal cause for dissolution.
Another eventuality is that, during the time frame of the dissolution, it is possible that losses have given rise to insolvency in accordance with article 2 of the Insolvency Law and it is necessary to request the declaration of bankruptcy. In such a case it is the liquidator or the legally nominated administrator, if precautionary measures have been taken, who, after confirming insolvency in order to settle the company’s debts, assesses the legal obligation of requesting bankruptcy.
Therefore, if during the general meeting the company chooses dissolution or declares through the courts, it will then be the remit of the liquidators or the legally nominated administrator to decide whether to start bankruptcy proceedings or not, with the exemption of commercial administrators who are as yet not covered by article 281 LSA, but by article 5 LC.
By Jesús Castro
www.costaluzlawyers.es
Getares beach in Algeciras, Campo de Gibraltar