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How do you sue a liquidated company? 4 Judgments and 1 Funeral

How do you sue a liquidated company? Both natural persons and legal entities (companies) can incur debts. Unlike natural persons who cannot be liquidated or extinguished, legal persons can be liquidated or extinguished. What happens then?

The company (legal entity) has the capacity to be a party, the capacity to act (Article 6.1.3 of the Civil Procedure Act). And it is extinguished, it disappears, after its liquidation which concludes with the cancellation of the entries in the Commercial Register. The question that arises is how to claim a debt from a company that no longer exists, that has been extinguished.

In order to liquidate a company, the law requires that a liquidation balance sheet be published. This must be published in the BORME and a newspaper. In this way, creditors can know that the company is being liquidated and can claim their debts.

The question then arises: what if the creditor did not read the newspaper or the BORME? Does he lose his right?

How do you sue a company that no longer legally exists? Does the creditor lose his rights?

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4 judgements that analyse how to sue a company that has been liquidated.

On this subject, the following three Supreme Court rulings define two opposing positions:

First thesis on how to sue a liquidated company.

  • A thesis maintained by the Supreme Court was defined in these two rulings (of 2011 and 2013):

The judgments of March 20th 2013 and December 27th 2011 maintained that “even though a company has been dissolved and liquidated. And the liquidation has been registered in the Commercial Registry, its legal personality persists as long as exist or may exist or appear in the course of time: contracts, legal relations or acts of any kind carried out during the time in which it carried out its business activity. It persist without the need to request the nullity of the cancellation”.

In other words, these two judgments recognise the capacity of these companies to be parties. It is understood that their legal personality survives, even if it does just to deal with pending legal relationships.

These two judgments of 2011 and 2013 were in line with the Resolution of the DGRyN of May 13th 1992: “The legal personality of mercantile companies does not end with the formalization of the liquidation operations. It ends when all their legal relations are exhausted. Meantime, they must respond for the old obligations that have not been extinguished and the obligations that have arisen”.

In the DGRN’s opinion, the cancellation of the registry entries of a company is a mere formula of registry procedure. It aims to record a certain vicissitude of the company but does not imply the effective extinction of its legal personality. This does not occur until the exhaustion of all the legal relations that the company has entered into.

This position of the DGRN was later confirmed in 2016 by the Resolution of December 14th 2016:

“(…) after the cancellation the legal personality of the extinguished company still persists. As a residual centre of accusation as long as the legal relations of the company are not totally exhausted. So that the cancellation of its entries does not prejudice the creditor. As long as the company’s aptitude to be the holder of rights and obligations is maintained. As long as all the legal relations of the company have not been exhausted. The cancellation of the registry entries of a company is nothing more than a formula of registry mechanics to record a vicissitude of the company. This vicissitude in the case of liquidation is that the liquidation is considered to have been completed. For this reason, it does not prevent the company from being subsequently liable if corporate assets appear that have not been taken into account in the liquidation. After the public deed of extinction of the company has been formalised and registered (cf. Article 398 of the Law on Corporations)”.

Second thesis on how to sue a liquidated company

Another, divergent, thesis was defined in this Judgment (dated 2012). This Supreme Court ruling (503/2012) of July 25th, changed the criteria followed to date. With regard to the legal effects derived from the commercial liquidation, warning:

“The definitive disappearance of the company will only occur when the cancellation corresponds to the real situation. That is, when the company has been liquidated in such a way that it has not left: unsatisfied creditors, unpaid shareholders and undistributed assets. Otherwise, the shareholders and creditors may logically, in accordance with the general rules, request the nullity of the cancellation. They also may request the reopening of the liquidation, in order to satisfy their credit at the same time. And in any case, sue those who have caused the undue cancellation of the company’s registration”.

The STS of 2012 maintained that once the company was cancelled from registry, it lacked the capacity to be a party. The Supreme Court established that the cancellation of the registry entries signals the moment of extinction of the corporate personality. Since the cancellation of the registration, the company has no representatives or assets. And it is useless to file any claim against it.

Definitive thesis on how to sue a liquidated company

  • Finally (2017) a sentence of the Plenary, of the 15 Magistrates, exercising their nomophylactic function set doctrine for the future. And in this way they resolve the differences of criteria that the Court itself had maintained until now. Judge-Rapporteur responsible for taking up such a challenge? The usual one: Ignacio Sancho Gargallo.

Due to its importance, we give complete reference to the Judgment:

STS 1991/2017, of May 24, 2017 (ECLI: ES:TS:2017:1991). Id. Cendoj 28079119912017100010

12 Grounds for suing a company that has been liquidated under STS 1991/2017

  1. The registration of a company’s deed of incorporation in the Commercial Register (CR) is necessary to acquire legal personality.
  2. This does not mean that company acquires legal personality with registration in the CR of the deed of incorporation.
  3. Failure to register the deed of incorporation does not remove the company’s legal personality.
  4. Companies in formation or irregular companies have legal personality but have not registered their constitution in the CR.
  5. The following may be sued: “entities which, not complying with legal requirements for incorporation, are made up of a plurality of personal and property elements serving a specific purpose”.
  6. The extinguished (liquidated) company retains legal personality in respect of outstanding claims based on overdue liabilities. Those liabilities should have been part of the liquidation operations.
  7. Despite termination of a company, remains a residual centre of accusation until legal relationships owned by company are fully exhausted.
  8. Article 399 provides the joint and several liability of former shareholders for company debts. Not paid up to the limit of their respective liquidation quotas, in the event of overdue liabilities.
  9. In many cases, however, company will have to be sued in order to have the claim recognised beforehand or simultaneously.
  10. Not only should the possibility of making a claim against the company not be denied. But the previous annulment of the cancellation and the formal reopening of the liquidation should not be demanded.
  11. The claim against the extinguished and liquidated company should be made under the representation of its liquidator. While the claim relates to the liquidation operations.
  12. Finally, article 400 of the Corporate Enterprise Law attributes this representation to the (former) liquidators for the formalization of legal acts. On behalf of the company, after its cancellation.

What happens if unsatisfied liabilities arise after a company’s liquidation and cancellation from the register?

Recent pronouncement of Supreme Court, considers that a company does not lose legal personality until its entire commercial and legal relations are extinguished. That is to say:

  • The cancellation of the registration of a company is a formula of registration procedure. But it does not imply the effective extinction of its legal personality.
  • Legal personality ceases to exist when all the legal relationships that the company has entered into are exhausted.

It is therefore entirely lawful and justified to initiate proceedings against the company. A claim that does not require the initiation or application for the cancellation of the extinction´s registration.

Creditors should not be deprived of their claim in court. They can address themselves directly to the company, represented by its liquidator. As the legal personality, and therefore its capacity, remains latent.

Similarly, in the event that unsatisfied liabilities arise after termination, liability action could be brought against the partners. Liability is limited to the respective liquidation quotas obtained by each of them.

Conclusions

Failure to register the deed of incorporation does not deprive the company of legal personality. Until it is effectively registered a company can operate, although it is in an irregular situation.

With extinction the same thing happens. If the company is dissolved, liquidated and expired, and there are liabilities, the liquidation is not completed. The company cannot be considered extinct. The company will retain its legal personality and therefore its capacity to be a party to any proceedings. The definitive disappearance of a company only occurs when the cancellation responds to a real situation.

Therefore, creditors who have been dissatisfied with their claim may lodge claims against both the company and the shareholders (in liability proceedings).

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Company Dissolution: Directors’ Duties and Liabilities

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