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How to Close a Business when Everything Goes Wrong

What happens when the life cycle of the company comes to an end? By its own decision or by imposing the circumstances, closing is the only solution.

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Just over 21,000 companies became extinct in Spain from January to September 2017, according to the Mercantile Registry. Data that only reflects the tip of the iceberg of a more complex reality, because, when everything goes wrong, there are many entrepreneurs who decide to lower the blind and wait for the judicial and administrative machinery to start walking.

This is what some technicians call “closure to the Spanish”, a closure that does not use any legal mechanism and that is usually accompanied by the non-payment of debts contracted. A practice that will persecute the employer for years, making it impossible or limiting their ability to undertake again.

According to Juan Sánchez Corzo, partner of Life Abogados, “you can choose between an orderly closing or not, but the best way to close legally without paying all the debt is the bankruptcy. Any other will represent a detriment to other parties that are going to hold you accountable. “

Carlos Pavón, of Gaula Abogados, provides another convincing argument to comply with the rule: “In the framework of an orderly liquidation, the employer can cover only 10% of the debt,” he explains, although he warns that “the Law bankruptcy can never be understood as a procedure for obtaining money. “

Gonzalo Navarro, Corporate and M & A partner; of Grant Thornton in Spain, points out that it is complicated to speak of percentages of debt reduction because the variables in play are many, from the available assets to the amount of the debt, “but we usually see transactions with 30% and 60%. ” We must take for granted that the entry of a company in competition does not always entails the extinction of the company. In fact, some overcome this process and continue to operate normally.

PHASES OF CLOSURE WITHOUT INSOLVENCY

In situations of dissolution in which there is no insolvency (for retirement of the employer or for any other reason), the most basic process is the ‘full-fledged’, which as Sara Sánchez, professor at IE Business School, explains, “does not require an agreement of board. One possibility that can be accepted is when societies have stipulated in their statutes a certain term of life, which is already achieved “. Another assumption would be that of the business group that wants to reduce its corporate structure. Other extinctions are not strictly voluntary and do require agreement of the general meeting. They can be, as Sánchez points out, “due to the fulfillment of the corporate purpose for which it was established [when a real estate company set up to market a certain promotion has completed the sale, for example], or on the contrary, due to manifest impossibility of compliance its social purpose or losses. They are assumptions that do not have to imply an insolvency but that advise the dissolution, for which the approval of its partners in board will be required “. Once this circumstance is known, the partners must be summoned within two months, and the process will begin.

– Dissolution phase

At the request of the employer or any member, the board meets and decides by simple majority dissolution. Immediately the company is in liquidation period and “the social objective of the company changes, since all its activity must be directed to liquidate”. Sanchez explains: “That does not mean that I can not continue to market the product or service as I had been doing, but now the ultimate goal is to end their activity.” In addition, it is obliged to add to its denomination the phrase ‘in liquidation’, which must accompany all its documentation and commercial communications.

A less traumatic alternative pointed out by Professor Sánchez is the so-called “voluntary procedure”. The main advantage is that the company will not have to justify the reasons why this decision is made, “you will not have to explain that you have had losses, but in return you will need the general meeting agreement to be approved by a qualified majority “(with different percentage of approval in the case of an SL and SA).

In any case, the dissolution agreement must be submitted to a public deed before a notary and registered in the Provincial Commercial Registry, for which a month is usually available from the time the Meeting is held.

– Settlement phase

Its purpose is the distribution among the shareholders of the resulting assets after having collected the outstanding loans and having paid the social debts.

The first step is the appointment of the liquidators. They can be the people who came acting as administrators or others appointed specifically for this mission, as it happens when there is a creditors’ contest. They are formalities to be made in the General Meeting and which must then be registered in the Provincial Commercial Register.

From here, Sanchez differentiates three subphases. In the first, during the first three months, the liquidators carry out an inventory and a balance sheet, “where you see what the company has”, to inform the shareholders without it being necessary to reconvene them in a meeting. In the second, the credits and debts must be liquidated, being able to sell the patrimony to face the payments, “existing an obligation to present accounts once a year and provide periodic information to its members”. In the case of some companies, the liquidation can last for years.

The third of the obligations is the drafting of the final balance sheet that will serve as the basis for the distribution among the partners. Once again in a general meeting, the liquidators must submit the aforementioned liquidation balance, a complete report of the operations carried out and, finally, a division project. After its presentation, it must be voted on and approved. In case some of the partners do not agree, they have two months to challenge it in court.

– Extinction phase

“Only after two months have elapsed, and it has not been challenged or, in the opposite case, when there is already a final ruling that resolves, the company can be definitively terminated,” explains Sánchez. After the distribution among the partners, the liquidators are obliged to register the extinction of the company in the Mercantile Registry, by means of a public deed that contains: the final liquidation balance sheet, the approval agreement, the declaration of payment to the creditors and the division of social assets among the partners “. Finally you can cancel the registration entries, which means that the company is completely extinguished in the absence of processing the withdrawal in Finance, Social Security and other public records (Data Protection Agency, Industrial Registry or other specific sectors.

DISSOLUTION AND SIMULTANEOUS LIQUIDATION

In many cases, this procedure is not followed strictly. According to Gonzalo Navarro, “a dissolution and simultaneous liquidation is made, which is a very short procedure that consists in paralyzing the activity and ending the contractual obligations. Thus, the day on which the clean balance of liabilities is held, a general shareholders’ meeting agreement that contemplates dissolution and liquidation is promoted at the same time. That agreement is submitted to a public deed and is registered in the Mercantile Registry.”

This procedure, according to Navarro, “avoids the process of opening liquidation, although the usual thing is to use it in small companies or that have clear contractual relationships and with a mass of assets that can face the liabilities”.

CLOSURES WITH LOSSES

So far we have seen a procedure marked by the agreement between partners and notifications to the Administration. But, as we said, reality is more complex. In most cases, the process of extinction is marked by insolvency, and the employer chooses whether to resort to judicial protection that involves a bankruptcy or act to the brave and give closure by consummate.

The law establishes that when the losses reduce the net worth of the company to an amount less than half of the capital stock, or is capitalized adequately (for example with a new injection of the partners) or the dissolution procedure is initiated within the term two months The same as when an imminent situation of widespread defaults is expected. The bankruptcy is a measure that tries to avoid greater evils, but to which in many cases it turns a deaf ear. You have to know that, at that point, the debts caused will be able to be claimed from the administrator. Navarro advises strongly to value other alternatives and only go to the tender when there is no other way: “Capital contributions may be required to shareholders, find a way of financing or refinancing, or even sell assets. We must be clear that the contest means a very important wear, so it will always be preferable to resort to an extrajudicial procedure to make a more orderly and, ultimately, less burdensome closure “. But if you finally resort to the contest you have to act quickly. According to Sánchez Corzo, “if you act with time, you may not avoid ruin but at least you will not be an outlaw”. As is well known, the entrepreneur is responsible with his assets for the debt incurred.

If the margin of maneuver is insufficient to deal with debts and payments, Carlos Pavón alludes to two scenarios. In the first, the administrative body with the team of liquidators at the front “informs the Court that there is no effective capacity to meet the payments even liquidating all the assets with which the company has, and for

The judge’s supervision is requested. ” In addition to the supervision of bankruptcy, the judge’s mission, “is to verify how this situation has been reached in order to determine if there may have been negligence of the administration and to analyze possible liabilities”.

CREATIVE ACCOUNTING MUST BE AVOIDED

Pavón recalls that “the judge will not analyze whether or not he is a good businessman but has been diligent in his decisions and actions. When responsibilities are determined, in 99% of cases, they are justified by accounting irregularities. ” Hence the importance of balance sheets being realistic, “companies that use so-called creative accounting, can make it worse”.

According to Sánchez Corzo, “sometimes the businessman deceives himself and, after years of losing money, he does not reduce expenses”. But something that further aggravates this situation is the use of creative accounting: “They have made so many artifices that the balance is no longer similar to the accounting reality of the company”.

HOW TO ACCELERATE THE PROCESS

But the second scenario described by Pavón can facilitate the process. This is what he calls the “automatic archiving contest”: “There are occasions when, in order to expedite the judicial process, the court is reached with the company practically liquidated. In this way, when the judge analyzes the documentation and declares the bankruptcy of creditors, you can practically proceed to the closing “.

It is a practice that seeks to subtract workload from the courts and that can be very effective in cases of small companies and others with mortgaged assets. “From the point of view of the company, its main advantage is the speed of resolution.” A time that can also be important when the company goes to sell machinery, vehicles or computer equipment that in the terms of the court, sometimes of years, will lose important part of its value until its public auction arrives.

Among the conditions that Pavón points out to qualify for the abbreviated contest are not having debt with more than 50 creditors, and that the accumulated debt does not exceed five million euros. In addition, the assets of the company must not exceed this same amount.

Another factor that largely determines the decision on how to proceed is the amount of debt contracted with Public Administrations. One of the suggestions that can be heard in the office of the advisers is that, when there is debt with the Treasury and Social Security, it is suicidal to avoid the bankruptcy procedure.

The margin of negotiation with the Spanish Administration is currently very limited, contrary to what happens with other types of creditors, including banking: “If you know how to negotiate it is possible to reach particular agreements with creditors and close avoiding the bankruptcy of creditors , but with the Administration this negotiation is always limited to the postponement of the payment, not to the withdrawal “, sums up Sánchez Corzo.

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