General Rule
In general, article 363 (1) (e) of the Spanish Law on Capital Companies (Ley de Sociedades de Capital, LSC) provides that stock companies and limited companies which suffer losses that cause their equity to drop to less than half of its share capital must be wound-up. If a company found itself in such a situation, its directors would be obliged to call a general meeting, within two months, to wind up the company.
In the event that the directors failed to call such meeting within the established deadline, according to the LSC, they would be held personally liable for any debts incurred after the cause of dissolution has occurred.
Moratorium
During the COVID-19 pandemic, a series of extraordinary corporate measures was adopted that changed the criteria for determining the existence of a cause for dissolution in the sense of Article 363 (1) (e) LSC. These measures are in force until the end of the 2024 financial year. This moratorium was adopted to mitigate the consequences of the pandemic and later extended in light of the energy crisis aggravated by the war in Ukraine. It aimed to “avoid the dissolution of companies viable under normal market conditions” and for them to be able to “restore balance to their equity.”
The measure allows for the losses accumulated by a company in 2020 and 2021 to be taken into account from the close of the financial year beginning in 2024, although “for the sole purpose of determining whether there is a cause for dissolution as laid down in Article 363 (1) (e) LSC.”
However, this does not imply that these losses do not exist; on the contrary, they have to be reflected in the accounts, as they may have an impact in other areas, such as the determination of the existence of a bankruptcy situation. The temporary exclusion of the losses accrued in 2020 and 2021 only affects the determination of the existence of a cause for dissolution, i.e. if the equity of a company is less than half of its share capital.
Furthermore, the moratorium clearly stipulates that the directors must call a general meeting to decide on the dissolution of the company if, in the financial years 2022, 2023 or 2024, i.e. excluding the losses of the years 2020 and 2021, the equity is reduced to less than half of the share capital. In other words: this moratorium would only apply if the cause for dissolution originated from the losses incurred in 2020 and/or 2021.
End of the Moratorium, Consequences and Solutions
As stated above, this moratorium ends with the financial year that began in 2024.
Given that, in accordance with Article 26 LSC, the financial year for most companies ends on 31 December of each year and that the annual accounts must be prepared by the directors no later than three months after the end the financial year, the losses of 2020 and 2021 will have to be taken into account in the new financial year 2025 for the preparation of the annual accounts for 2024.
Accordingly, it is possible that companies that have not yet incurred in a cause for dissolution due to this moratorium will suddenly be faced with the choice between dissolving the company and taking various countermeasures, which the shareholders will have to decide on at the general meeting called by the directors.
Increase or reduction of capital, the conversion of a debt into a (profit or equity) participation loan or voluntary contributions by the shareholders are some of the possible measures that shareholders can take to remove the cause for dissolution provided for in Article 363 (1) (e) LSC.