If severe losses and insolvency occur, the directors’ duty to seek wind -up no longer applies if the company files for insolvency and is declared insolvent. While the composition is being carried out, the duty to seek wind-up and the directors’ resulting liability will not arise.

This ruling clarifies the role of the directors’ corporate duties in the event that legal grounds can be attributed to the company for wind-up due to losses, and the obligation to file for insolvency if the company becomes insolvent.

In short, the Supreme Court states the following:

  1. The circumstance of insolvency must not be confused with a situation of losses that have reduced the company’s equity to less than half of its share capital.

Although these two situations often occur simultaneously, they sometimes arise separately: (i) if the wind-up is due to equity losses that have reduced the company’s equity to less than half of its share capital without the company having become insolvent, directors must implement the measures provided for in section

365 of the Spanish Companies Act; (ii) if insolvency arises in the absence of legal cause for wind-up, an application for insolvency must be made in compliance with the Insolvency Act.

If both situations (insolvency and cause for wind-up due to equity imbalance) arise simultaneously, the duty to seek wind-up does not apply if the company files for insolvency and is declared insolvent.

This does not mean that the declaration of insolvency will release the directors from the liability —established in section 262.5 of the Public Limited Companies Act (now section 367 of the Spanish Companies Act)— that they may have incurred before insolvency, although declaration of insolvency will suspend the exercise of any liability action (section 50.2 of the Insolvency Act) and interrupt any proceedings that are under way (section 51.1 bis of the Insolvency Act).

  1. After declaring insolvency, the directors’ legal duty to seek wind-up will no longer apply, and wind-up will be considered a legal effect of the beginning of the liquidation process (section 145.3 Insolvency Act) if this insolvency outcome is sought. The duty to seek wind-up, and the liability resulting from not doing so within the prescribed term, will not apply while the composition is being carried out.

Corporate law prevents this duty from being applied, establishing that (i) insolvency proceedings restrict the directors’ duty to seek wind-up on the grounds that the company’s situation of insolvency is governed by a separate set of regulations, which expressly provides for wind-up of the company as a necessary result of beginning the liquidation phase (section 145.3 of the Insolvency Act), and (ii) if a composition is approved, the debtor must seek wind-up if, while the composition is in force, it becomes aware that it will be unable to make the agreed payments and perform the obligations agreed after approval (section 142.2 of the Insolvency Act). Any breach of that duty may have a reflexive effect on judgments/rulings relating to insolvency classification, specifically the conduct provided for in section 164.2.3 of the Insolvency Act.