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Civil responsibility for administrators abandoning a company

We can define “limited company abandonment” as the situation where the shareholders and/or administrators of a limited company stop working effectively bringing commercial activities to a halt. This often happens when the company has debts and the shareholders/directors/administrators are unwilling to deal with the compulsory liquidation process, publish the accounts and pay their tax obligations. This situation can be extremely harmful to company creditors as the normal bankruptcy process cannot be followed and the normal debt collection process will be distorted.

Spanish law protects creditors with articles 105 of the Law 2/1995 of March 23, for Limited companies (Ley 2/1995 de Sociedades de Responsabilidad Limitada) and provides an effective mechanism for dissolving the companies, and offers a system of sanctions for irresponsible administrators. Companies will go into liquidation because of bankruptcy, and particularly when a commercial court declares them unable to pay their creditors.

If a company cannot continue because it cannot pay its creditors, or the capital of the company is below the capital share, the administrators have the following obligations:

  • Call a general board meeting to formalise the company dissolution within two months from when it became impossible to carry out the company activities. (art. 105.1 of the Law on Limited Liability Companies (Ley de Sociedades de Responsabilidad Limitada LSRL).
  • If the board cannot come to a dissolution agreement the administrators are forced by law to call for legal company dissolution (art. 105.4 LSRL).

Nevertheless two things will have to be demonstrated by creditors:

  1. Action in good faith and presence of a real company debt
  2. Causal relationship between: additional damages and debts after the grounds for dissolution and the lack of action from administrators

Non-compliance with their legal obligations can generate a strict system of liability under which administrators will be held accountable with their personal assets. In any case in according to article 40-43 of the Tax Code (Ley general Tributaria LGT): The administrators will be responsible for tax violations and the total tax liability in cases where serious offenses committed by legal representatives, (when the administrators do not perform the necessary operations that they are responsible for, such as to comply with tax obligations, consenting to the failure or agreeing to situations which allow the violations).   Present administrators will also be responsible in any case for the outstanding tax obligations of legal representatives who have ceased working as administrators.

As from the time that the non payment of the tax is due by the company, the liability will be payable by the administrators, in two different circumstances:

  • First, the subsidiary liability for tax violations (art. 77 LGT) committed by the company administrator, (the scope of liability is different depending on the offence, i.e. in simple violations the administrator’s liability is limited to the penalty).
  • Second: instead, the company administrator is liable for the total tax debt, in serious tax violations.

The procedure to declare and enforce the subsidiary liability of company directors and administrators shall be governed by the provisions of Art. 176 LGT. The tax authority has to prove the guilt of the company administrator, (he is presumed innocent as per the article 24 of the Constitution, as in any other process), and prove the facts to be able to subsequently demand his tax liability. Be aware that there is also subsidiary liability for the administrator for the payment of outstanding tax liabilities for S.A and S.L companies, who have ceased business.