Thus, the blocking of companies in such a way that it is impossible for them to function is foreseen as a legal cause for dissolution of the company itself. The previously mentioned statement is based on Article 361.d of the Law on Corporations (LSC).
Let us begin. Dissolution due to paralysis of the corporate bodies.
The dissolution of the Company.
What’s the dissolution of a Company ?
It is the legal act that opens the process of liquidation that will lead to the extinction of the company.
Consequently, the dissolution itself does not end the company, nor does it determine the extinction of the legal personality. Nor does it totally paralyse its activity, although it does transform the profit-making activity into a mere liquidation activity
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Legal grounds for dissolution.
In order for a dissolution to be pertinent, one of the causes provided for in the LSC must be present. Such causes can be grouped as:
- For the course of the term set out in the articles of association.
- For the course of one year since the resolution to reduce the capital to below the legal minimum was adopted. Provided that this is the result of compliance with a law. In addition, the conversion, dissolution or increase of capital up to the legal minimum cannot have been registered.
- For the opening of the liquidation phase in the Bankruptcy Procedure.
Voluntary dissolution requirements:
- By resolution of the General Board.
- By the merging or total división of the Company.
Legal dissolution requirements:
- Termination of the activity that constitutes the corporate purpose.
- Existence of losses that reduce the net worth to less than the share capital.
- Due to the paralysis of the Corporate bodies.
This last legal cause is the subject of our study.
When do Corporate bodies become paralyzed?
The paralysis of the Corporate bodies occurs when it is impossible for them to function. That is to say, when the necessary majorities to take resolutions at the General Meeting or at the Management Board are not obtained on a continuous basis.
It should be noted that reference is made to “the corporate bodies”. This leads to an erroneous idea about the paralysis. On many occasions it is considered that both the General Meeting and the Board of Directors should be blocked. This is not true. This paralysis can be inherent to just one of both organs.
However, the Board of Directors is of notorious importance. This is because it is permanently responsible for the management of the company. As well as acting for the company in relations with third parties. This situation can normally be overcome by the General Meeting.
Therefore, it is understood that, as a rule, it is the paralysis of the General Meeting that is the real cause of the dissolution.
The General Meeting: the determining body for the dissolution of the company.
The fact that the board is the body that determines the dissolution has its justification. It has the capacity to unblock a hypothetical blockade of the Board of Directors. It should be remembered that the Board of Directors is always subject to the appointment and removal of its members by the General Meeting. Therefore, the General Meeting could resolve such a situation by this means.
As established in Supreme Court Ruling number 373/2010, the blockage of the General Meeting can be externalised in both ways. In the first place, by means of the impossibility of being convened or constituted. And secondly, through the impossibility of adopting resolutions. And, therefore, this last situations could happen despite the fact that those previous stages had been overcome.
In this specific case, it is also impossible for the company to function.
Therefore, the paralysis of the General Meeting does not have to mean the paralysis of its normal functioning. The conflict will only be noticed when the partners have to make vital decisions for the continuity of the company. An example of this is the approval of the Annual Accounts.
When does this unwavering disagreement between partners occur?
Precisely in cases where the share capital is divided equally and the partners have different opinions.
This is often the case in small and medium-sized companies. Usually in limited liability companies, composed of only two partners or equal groups of partners.
Very often they are formed with a percentage of shares or stocks in the company distributed in equal parts. All this is based on a single criterion: the trust that exists between them.
However, the problem appears after a few years, as this trust does not always persist.
We therefore stress the importance of implementing alternative mechanisms to prevent corporate blockage. Among them, there are previous mechanisms (partners’ agreements) or later ones (sale of the company).
Obligation of the Directors to convene the dissolution.
Finally, the Law entrusts the directors with the obligation to convene the General Meeting to dissolve the company. Consequently, they must convene it within two months of the date on which the existence of such cause is ascertained. If the agreement to dissolve the company is not reached within another two months, they must resort to a judicial dissolution.
In the event of failing to comply with these obligations, the directors will be jointly liable for the social debts subsequent to the occurrence of the cause for dissolution. In addition, any partner or shareholder may request the calling of a meeting for the purposes indicated and any interested party may request the judicial dissolution.
Key aspects to remember.
Mere disagreements between partners or even hostile situations between partners is not enough reason for dissolution. We must therefore bear in mind that:
- The existence of mere transitory and surmountable difficulties or obstacles in the realization of the social purpose is not a cause for dissolution.
- This cause of dissolution can occur even when the Board of Directors is functioning. That is, even if the company continues to carry out its activity.
- It must be impossible for the company to function.
Our Law does not establish any other solution for this situation than compulsory dissolution. If there is no agreement between the partners on the dissolution of the company, the company must go to Court to solve the situation.
The dissolution due to the paralysis of the corporate bodies is a legal case established in the LSC. Thus, if the company is blocked, there will be an obligation to request the dissolution of the company. However, it must be expressly taken into account when there is a corporate blockage. Not in all cases can one speak of a standstill of corporate bodies.
So please, keep this in mind. At the time of agreement, at the time of investment, and at the time of creation, 50/50 is not an “issue”. After all, there is nothing like the institution of civil marriage. This is the best example to understand our laxity in accepting this type of corporate situation.
As a way of enriching this collaboration, we recommend reading Supreme Court Ruling No. 5565/2014.
If this article has been of interest, we also suggest you to read the following article published on our website