Year 2023: Extension of the suspension of dissolution due to losses

In 2023, once the annual accounts for the financial year 2022 have been prepared, when comparing the amount of equity with the share capital to check whether there is cause for dissolution, the losses of the financial years 2020 and 2021 will not have to be taken into account.

The Government extends the accounting moratorium for 2022, 2023 and 2024, i.e. the non-consideration of losses incurred in 2020 and 2021 as grounds for dissolution due to losses provided for in the Capital Companies Act, with the aim of allowing viable companies a sufficient and definitive period of time to normalise their situation.

Royal Decree-Law 20/2022, of 27 December, on measures in response to the economic and social consequences of the war in Ukraine and to support the reconstruction of the island of La Palma and other situations of vulnerability, extends the exceptional measure provided for in Article 13 of Law 3/2020, of 18 September and, consequently, for the purposes of the legal grounds for dissolution due to losses, losses for the financial years 2020 and 2021 will not be computed for a period of 3 accounting years; i.e. the losses of the financial years 2020 and 2021 will not be taken into account in the accounting years 2022 and 2023 or until the end of the financial year 2024.

The impact that the healthcare crisis and inflation still have on the economic results of many companies has led to the amendment of Law 3/2020 of 18 September on procedural and organisational measures to deal with COVID-19 in the field of the Administration of Justice, in order to extend deadlines that were due to expire at the end of the year.

For the sole purpose of determining the concurrence of the cause for dissolution provided for in article 363.1.e) of the revised text of the Capital Companies Act, approved by Royal Legislative Decree 1/2010, of 2 July, the losses of the financial years 2020 and 2021 will not be taken into consideration. In the event that, taking into account only the results of the financial years 2022, 2023 or 2024, losses result that reduce the net assets to an amount of less than half of the share capital, the legal cause for dissolution will be considered to have arisen.

A rigorous application of mercantile legislation on dissolution would have even more devastating consequences.

Let us not forget that article 363.1.e) of the Capital Companies Act establishes that the company incurs grounds for dissolution when the losses leave the net assets reduced to an amount of less than half the share capital, which entails the obligation of the administrator to call a general meeting within two months to resolve on the dissolution (or, if appropriate, to file for insolvency proceedings).

The extension of the suspension of dissolution due to losses expressly indicates that the two-month period for directors to call a general meeting begins to run from the “close of the financial year”, which means that the calculation would begin as early as 31 December (if the financial year coincides with the calendar year), without waiting for the annual accounts to be drawn up in March.

Temporary and exceptional nature.

Losses in 2020 and 2021 that have mutilated the company’s net worth to the point of dissolution will have consequences for the result in 2024.

If the legislator were to definitively forgive the losses, we would keep companies with highly compromised net worth situations in the UVI, with the risk that this entails for the security of commercial transactions.

Directors’ liability.

The issue should be of particular interest to the members of the administrative body, given the severe liability regime assumed in the event that, once the cause for dissolution has arisen, they do not adopt the measures that the Law imposes on them.

In these times of recession, when the turnover of companies may be considerably affected, all de jure or de facto directors should be aware of the situation of the company or companies they manage, in case it is necessary to call a shareholders’ meeting with the aim of promoting a capital increase, initiating dissolution proceedings (with an orderly liquidation of their assets) or requesting voluntary insolvency proceedings.

Article 365. Duty to convene.

1. The directors must call a general meeting within two months to adopt a resolution to dissolve the company or, if the company is insolvent, to file for insolvency proceedings. Any shareholder may request the directors to call a general meeting if, in his opinion, there are grounds for dissolution or if the company is insolvent.
2. The general meeting may pass the resolution of dissolution or, if it is on the agenda, such resolution or resolutions as may be necessary to remove the cause

Article 367. Joint and several liability of the administrators.

1. Directors who fail to comply with the obligation to call a general meeting within two months to adopt, where appropriate, a resolution for dissolution, and directors who do not request the judicial dissolution or, where appropriate, the company’s insolvency proceedings, within two months of the date set for the meeting to be held, when the meeting has not been held, or from the day of the meeting, when the resolution is against dissolution, shall be jointly and severally liable for the company’s obligations following the occurrence of the legal grounds for dissolution.
2. In these cases, the corporate obligations claimed shall be presumed to be dated after the occurrence of the legal grounds for dissolution of the company, unless the administrators can prove that they are dated prior to this date.

If the cause for dissolution is suspended due to losses, the joint and several liability of the directors may not be invoked on this ground.

When can the administrator know that the company is in a state of dissolution due to losses?

Suspensions, postponements or exceptional measures aside, this controversy has always existed both in times of economic normality and in times of uncertainty. The question is not trivial. It is very important for directors to determine the exact moment at which their liability starts. Article 367 of the LSC only states that the directors “shall be jointly and severally liable for the company’s obligations subsequent to the occurrence of the legal cause for dissolution…” if they do not call a meeting within two months, or if applicable, and if appropriate, do not request judicial dissolution, but when should the calculation of these obligations begin?

We must take into consideration 3 points in time:

• At the close of the financial year, in most cases on 31 December. When the accounts are closed, the director can already establish such losses,
• At the end of the preparation of the annual accounts, which coincides with the time when the director signs them, and
• At the date of approval of the accounts by the general meeting, which is when the accounts become final and firm.

The doctrine is divided. For some, the fewest, the date should be the date on which the annual accounts are drawn up and closed “because that is when the directors detect the losses”.

For others, including the majority in case law, “at any time during the life of the company when they are detected”. In other words, if in any quarterly balance sheet the existence of losses is detected, the obligation to call a meeting will arise. Nowadays, with computerised accounting systems, the situation can be perfectly known.

In short, in the event of a conflict, it will be a matter for the Courts to assess, especially because the creditor will not normally be aware of the loss-making situation until the accounts for the financial year are filed, which will take place some months after the meeting is held.

If you have any doubts regarding this issue, please do not hesitate to contact us, by telephone to Carles Monfort Codina or by e-mail to cmc@btsasociados.com, we will be delighted to help you.