Introduction
In the field of Spanish company law, company directors hold a position of particular importance, assuming responsibility for the day-to-day management of the company. However, this position entails specific obligations that are intensified when the company is in a situation of economic crisis.
Among these responsibilities, the one derived from so-called ‘Qualified Losses’ stands out, regulated in Articles 363 to 367 of the Capital Companies Act (LSC). This legal regime establishes specific obligations that directors must comply with when the company’s assets are seriously eroded, setting up a system of protection for both the company’s shareholders and creditors.
The term ‘Qualified Losses’ refers to a situation in which the value of the company’s net assets is less than half of its share capital. This situation is regulated in Article 363.1.e) of the LSC, which establishes as a cause for dissolution by operation of law ‘losses that reduce the net assets to less than half of the share capital’.
The Obligations of Directors
Article 365 of the Capital Companies Act clearly establishes the obligations of directors when there is cause for dissolution due to qualified losses.
This provision stipulates that directors must convene a general meeting within two months to adopt the dissolution agreement or to adopt one of the alternative measures, unless the company has already been declared bankrupt. This obligation to convene a meeting is the first link in a chain of duties that seek to ensure that the crisis situation is addressed transparently and with the participation of the shareholders.
The two-month period established by the legislator is mandatory and begins to run from the moment the directors became aware or should have become aware of the existence of the cause for dissolution.
The agenda must necessarily include the adoption of one of the following resolutions: i) the resolution to dissolve the company, which is the natural consequence when it is not feasible to continue the business activity; ii) an increase in share capital to a level which, in relation to net assets, eliminates the cause for dissolution; iii) a reduction in share capital to the extent necessary to restore the balance between capital and net assets; or iv) a request for a declaration of insolvency, when the legal requirements for this are met.
Article 366 of the Capital Companies Act establishes a second obligation in the event that the general meeting has not been convened, has not been held or has not adopted the resolution to dissolve the company or alternative measures. In such a case, the directors must request the judicial dissolution of the company within two months from the date scheduled for the meeting, when it has not been held, or from the day of the meeting, when the resolution has been contrary to the dissolution or the removal of the cause.
Special mention should be made of the relationship between the Qualified Losses regime and the obligation to file for insolvency. Article 5 of the Insolvency Law establishes that the debtor must file for insolvency within two months of the date on which they became aware or should have become aware of their state of insolvency. Insolvency, defined in Article 2.2 of the Insolvency Law as the situation in which the debtor is unable to regularly meet its enforceable obligations, may or may not coincide with the situation of Qualified Losses. However, it is common for both situations to overlap, raising the question of which obligation prevails. The majority doctrine and the case law of the Supreme Court have established that, when the situation of qualified losses and the state of insolvency occur simultaneously, the obligation to file for insolvency proceedings prevails.
The Liability Regime: Assumptions and Scope
Article 367 of the Capital Companies Act establishes the liability regime applicable to directors who fail to comply with the obligations arising from the situation of qualified losses.
This provision stipulates that directors who fail to comply with the obligation to convene a general meeting within two months to adopt, where appropriate, the resolution to dissolve the company, as well as directors who do not apply for judicial dissolution or, where applicable, the company’s insolvency proceedings, shall be jointly and severally liable for the company’s obligations after the occurrence of the legal cause for dissolution. within two months from the date scheduled for the meeting, when it has not been held, or from the date of the meeting, when the resolution has been contrary to the dissolution or the removal of the cause.
Supreme Court Case Law: Interpretative Criteria
The Supreme Court has established highly relevant interpretative criteria that should be known for the correct application of the regulations. One of the most controversial issues has been the determination of the moment from which the two-month period for convening the general meeting should be calculated. The Supreme Court has established that this period begins when the directors knew or should have known of the existence of the cause for dissolution.
Insolvency Aspects: Interaction with the Insolvency Law
The relationship between the Qualified Losses regime and insolvency law is particularly complex and warrants specific analysis. As noted above, it is common for Qualified Losses to coincide with a state of insolvency that requires the filing for insolvency proceedings. Article 5 of the Insolvency Law establishes that the debtor must file for insolvency within two months of the date on which they became aware or should have become aware of their state of insolvency. This obligation takes precedence over those arising from the Qualified Losses regime when both situations occur.
Case law has specified that if the directors file for bankruptcy within the legal deadline, they are exempt from the liability under Article 367 of the Capital Companies Act, even if they have not previously convened a general meeting to agree on the dissolution.
Failure to comply with the obligations arising from Qualified Losses may be relevant in the insolvency classification phase. If the directors have continued the business activity without convening the meeting or filing for insolvency, generating new debts, this conduct may be assessed as aggravating the insolvency and lead to the insolvency being classified as culpable.
Conclusions
The regime of directors’ liability for qualified losses is one of the fundamental pillars of Spanish company law, providing an effective system of protection for shareholders and creditors in situations of serious financial deterioration. The regulations contained in Articles 363 to 367 of the Capital Companies Act establish specific obligations, the breach of which can have devastating financial consequences for directors.
The interaction between the regime of qualified losses and insolvency law adds an additional layer of complexity that requires careful analysis in each specific case.
At Belzuz Abogados, S.L.P.‘ Commercial Law Department, we offer our clients our extensive experience in advising company directors and companies in situations of financial crisis, ensuring compliance with all legal obligations and minimising liability risks.