1. The budget of the zombie company: The inactive commercial company.

Royal Legislative Decree 1/2010, of July 2, which approves the revised text of the Capital Companies Act (“Ley de Sociedades de Capital” or “LSC”), regulates from the birth (incorporation) to the death (extinction) of commercial companies. Specifically, Title X regulates the dissolution and liquidation of companies which, through an orderly procedure, aims for the peaceful extinction of the company by carrying out a series of liquidation operations aimed at paying creditors and distributing the remaining assets among the partners.

Consequently, when a business becomes unprofitable and there is no hope of recovery, if the partners do not agree to inject liquidity to revive the company, the diligent thing to do would be to dissolve and liquidate while there are still assets in the company, accept the death of the business, and give a dignified farewell to the company by achieving its rapid extinction.

However, either because hope is the last thing to be lost or simply due to ignorance of the directors' liability regime, in many cases this principle of the end (of the business project) is not diligently faced, and the company ends up in a state of insolvency and/or chronic inactivity.

Regardless of the implications and bankruptcy liabilities that may arise from the company's insolvency (on which we make a brief reflection at the end of this article), we will focus on those cases in which the company becomes inactive.

The lack of activity of the company obliges the management body to convene a general meeting within two months to agree on the dissolution and, if not agreed upon, to request judicial dissolution. Pursuant to article 367 LSC, if they fail to comply with this obligation, they will be jointly liable for social obligations subsequent to the occurrence of the cause of dissolution. Compliance with this duty is crucial for administrators if they do not want their company to become a zombie.

2. The zombie company: Concept and practical consequences.

If the inactivity of the company is prolonged and accompanied by that of its administrators, we would have what is colloquially known as a "zombie company"; a commercial company without activity, abandoned by partners and directors, wandering the market without being extinguished. This company will acquire different states of deterioration over time.

First, if accounting obligations are not carried out, the registration sheet will be closed pursuant to article 282 LSC and 378 of Royal Decree 1784/1996, of July 19, which approves the Regulation of the Commercial Registry (“RRM”). Specifically, one year after the end of the financial year without having filed the duly approved annual accounts with the Registry, the Commercial Registrar will not register any document except for a few exceptions (resignation or dismissal of directors, managersor liquidators; revocation or resignation of powers; dissolution of the company and appointment of liquidators; and entries ordered by the judicial or administrative authority).

Subsequently, the Tax Identification Number (“NIF”) could be revoked by the State Tax Administration Agency (“AEAT”). Article 147 of Royal Decree 1065/2007, of July 27, which approves the General Regulation of tax management and inspection actions and procedures and the development of common rules for the application of taxes (“RGT”), establishes the cases in which a company could be deprived of its NIF and, consequently, be unable to carry out acts with tax significance in the market. This could occur, among other reasons, in the case of (i) failure to deposit the annual accounts in the Commercial Registry for four consecutive financial years (article 147.1.f) RGT); (ii) failure to file the Corporate Tax for three consecutive tax periods (article 147.1.a) and 146.1.c) RGT); or (iii) inability to serve notifications at its address for a period of more than one year and after at least three attempts (article 147.1.a) and 146.1.d) RGT).

At this point, with the registration sheet closed and the NIF revoked, the company becomes a very difficult-to-eliminate living dead. To achieve the extinction of the company, it would be necessary to comply with the accounting and tax obligations that were not fulfilled in previous years. This can become a real headache for advisors and significantly increase the costs necessary to achieve the extinction of the company, not to mention the tax penalties and other debts that creditors may be claiming from the company.

The process necessary to prepare the company for its extinction, in addition to being costly, may take time. And during all that time, debts (tax or other creditors) will continue to generate interest, and the directors will continue to be affected by their liability regime

3. The liability regime of directors in zombie companies

As a starting point, we must bear in mind the general liability regime of directors, which is regulated in article 236 LSC, which states:

“Article 236. Budgets and subjective extension of liability.

Directors will be liable to the company, to the partners, and to the social creditors for the damage they cause by acts or omissions contrary to the law or the bylaws or by those carried out in breach of the duties inherent to the performance of the position, provided there has been intent or negligence.

Culpability will be presumed, unless proven otherwise, when the act is contrary to the law or the corporate bylaws.”

Consequently, directors who allow the company they represent to go from inactive to zombie will be liable for the damage caused to the company, the partners, and the creditors. In particular, they could be held responsible for the sanctions provided for companies in article 283 LSC for failing to deposit annual accounts within the established period, in amounts ranging from 1,200 to 60,000 euros (extendable for companies with annual turnover exceeding 6 million euros).

In addition to the general regime, as we have anticipated in section 1, the LSC regulates in its article 367 specific liability of directors for social debts. The article states:

“Article 367. Joint liability for social debts.

Directors who fail to convene the general meeting within two months from the occurrence of a legal or statutory cause for dissolution or, in case of subsequent appointment, from the date of acceptance of the position, to adopt, if applicable, the dissolution agreement or those necessary for the removal of the cause, as well as those who do not request judicial dissolution within two months from the date scheduled for the meeting, when it has not been constituted, or from the day of the meeting, when the agreement was contrary to the dissolution, will be jointly liable for the social obligations subsequent to the occurrence of the cause of dissolution or, in the case of appointment at that meeting or thereafter, for the social obligations subsequent to the acceptance of the appointment.”

Additionally, directors could be held subsidiarily liable for the company's tax debts under article 43 of Law 58/2003, of December 17, General Taxation (“LGT”):

“Article 43. Subsidiary liability.

The following persons or entities will be subsidiarily liable for the tax debt:

(a) Without prejudice to the provisions of paragraph a) of section 1 of art. 42 of this law, the de facto or de jure directors of legal entities that, having committed tax infractions, have not performed the necessary acts within their competence for the fulfillment of tax obligations and duties, have consented to non-compliance by those dependent on them or have adopted agreements that made the infractions possible. Their liability will also extend to sanctions.

4. Brief mention of the bankruptcy of the zombie company

In our previous analysis, we have assumed that the inactive company is not involved in a bankruptcy proceeding. However, if the directors' passivity includes non-payment to creditors, the company could become insolvent. In such a case, the company (its directors) would be obliged to file for bankruptcy within two months from the date they became aware or should have become aware of the insolvency, but being a zombie company, the submission of the general, accounting, and complementary documents necessary for the acceptance of the application would be a problem to resolve. Creditors could also request the declaration of bankruptcy.

 

If bankruptcy is eventually declared -voluntary or necessary-, Royal Legislative Decree 1/2020, of May 5, which approves the revised text of the Bankruptcy Law (“LC”), provides for a special liability regime in its Title X; in particular, article 442 LC states:

“Article 442. Guilty bankruptcy.

The bankruptcy will be classified as guilty when in the generation or aggravation of the state of insolvency there has been intent or gross negligence on the part of the debtor or, if applicable, their legal representatives and, in the case of a legal entity, its directors or liquidators, de jure or de facto, general directors, and those who, within the two years prior to the declaration of bankruptcy, had held any of these conditions.”

In the event of a guilty classification of the bankruptcy, which would be quite likely if the company had already become a zombie, article 456 LC regarding the bankruptcy liability of directors would apply:

“Article 456. Coverage of the deficit sentence.

When the qualification section has been formed or reopened as a result of the opening of the liquidation phase, the judge, in the qualification sentence, may condemn, with or without solidarity, the coverage, total or partial, of the deficit to all or some of the director, liquidators, de jure or de facto, or general directors of the bankrupt legal entity who had been declared affected persons by the qualification to the extent that the conduct of these persons that determined the classification of the bankruptcy as guilty generated or aggravated the insolvency.”

Thus, the bankruptcy judge could hold the directors personally liable for debts not covered by the assets of the bankrupt company if their conduct had generated or aggravated the insolvency.

All this, without prejudice to any criminal liabilities that may arise under the offenses related to punishable insolvencies.

5. Conclusion

In view of the above, in a situation of business losses, reduced activity, or any other cause that will inevitably end up leading to a conclusion of the company's commercial operations, the option of "closing down" should not be carried out because it only creates a zombie company that becomes increasingly difficult and costly to extinguish. This passivity can lead to personal liabilities for the directors that will persist until the situation can be resolved and the company is extinguished (which will not be easy).

Therefore, it is essential to have specialized advice in commercial and corporate law to avoid these situations. At Summons Abogados, we have extensive experience in accompanying commercial companies from their creation to their extinction - and throughout the time the company is active in business - to ensure the minimization of legal risks and the legal protection of our clients.