The extinction of a company is the process by which the entrepreneur carries out the necessary procedures to close the business. The extinction process is made up of certain acts required by law and must be followed accordingly. The dissolution of the company is the initial step and is necessary in order to proceed with the liquidation. It is not until the liquidation period concludes that the company can continue its course until its definitive extinction. In this article, we will go over in detail the intermediate process of company liquidation, analyzing its stages, legal requirements, and key aspects to consider.

 

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Legal framework and foundations of corporate liquidation

Liquidation is imposed from the moment the company is dissolved. This is stipulated by Article 371 of the Royal Legislative Decree 1/2010, the so-called Companies Act (LSC). It is also a process that must be in line with legal provisions, meaning that the bylaws or agreements between partners cannot modify them or make contrary decisions. This is because the LSC establishes a mandatory framework primarily aimed at ensuring payment to creditors.

Maintaining legal personality

During this stage, the company retains its legal personality but its ordinary activity is paused. Although the company is dissolved, **it continues to exist legally**. To reflect this status, the expression “in liquidation” must be added to its name, informing third parties of its situation.

Internal operation

The general meeting continues to operate under the rules set forth in the bylaws. However, the people responsible for carrying out this process are the **liquidators**, who may be appointed according to the bylaws or, if not, by the General Meeting.
With the opening of the liquidation period, the company’s organizational structure is modified: the administrators are automatically removed, and the liquidators assume all their functions.

 

Reasons for liquidating a company

The reasons for deciding to close a company can be quite varied. It may be due to a single cause or a combination of several, but some of the most common reasons include:
Insolvency of the Company: The company cannot meet all of its potential creditors. This situation may be caused by poor financial management, decreased market demand, or even a general economic crisis. In case of insolvency, a creditors’ bankruptcy proceeding may be requested.

Voluntary liquidation: Whether due to the completion of the company’s objectives or disputes among partners. If the objective is achieved and there are no plans to continue the business, the partners may liquidate the company. An insurmountable conflict that threatens the company’s viability may also be a significant reason.

Legislative changes: Legal modifications may render the company’s operations unsustainable or unprofitable, forcing the partners to adapt to the legal changes.

 

Operations and duties of the liquidators

The liquidators must perform a series of operations to definitively close the company’s accounts and extinguish it. So, what duties and obligations do they have?
Representation of the company before third parties: They have full capacity to sign contracts and act for the benefit of creditors and partners.

Inventory and balances: As soon as the process begins, the liquidators must create an inventory and balance with the company’s economic situation to get an accurate picture of the business. Once liquidation operations are completed, the liquidators must submit a final balance, a comprehensive report on these operations, and a proposed division of the remaining assets among the partners for approval by the general meeting.

Payment of corporate debts: They must collect social credits and pay debts. Before distributing assets to partners, the liquidators must pay all of the company’s debts.

Accounting and preservation: They must keep the company’s accounting and legal documentation for 6 years, as it may be required in the future for legal or tax inquiries.

 

Division of the company’s assets

The division of the company’s assets is the final step in the liquidation process, where the liquidators distribute the remaining assets among the partners, always after settling debts and other legal obligations. The law establishes that each partner’s **liquidation share** will be proportional to their participation in the company’s capital. It is possible to receive the liquidation share in kind.
The liquidators conclude the process by issuing the public deed of the company’s extinction.

✅ For more information, you can contact Adlanter’s corporate advisory.

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