Commercial and Corporate Law in Spain: Consequences of Failing to File Annual Accounts with the Mercantile Register

Javier Coll Sempere Abogado [email protected] +34 91 319 96 86

I. What are Annual Accounts?

Before we discuss the possible consequences of not depositing the annual accounts, we must first clarify their definition under to Spanish law. According to the Spanish Law on Capital Companies (Ley de Sociedades de Capital, LSC), they reflect the economic, financial and equity situation of a company at the end of each financial year and include:

• Balance sheet (balance)
• Profit and loss / income statement (cuenta de pérdidas y ganancias)
• Statement of changes in equity (estado de cambios en el patrimonio neto)
• Cash flow statement (estado de flujos de efectivo) and
• Notes to the financial statements (memoria)

The company’s administrative body is responsible for preparing the annual accounts, which must be submitted to the ordinary shareholders’ meeting for approval within a maximum of six months after the end of the financial year.

The obligation to deposit the approved annual accounts with the Mercantile Register rests on every company, regardless of its size, and must be complied with within one month of approval, i.e. within a maximum of seven months after the end of the financial year.

Failure to comply with the filing obligation can have legal and practical consequences for both the company and its directors.

II. Consequences of Failure to File Annual Accounts

1. Financial Sanctions

One of the most important direct consequences is the imposition of fines by the Spanish Institute of Accounting and Auditing (Instituto de Contabilidad y Auditoría de Cuentas, ICAC), which reports to the Spanish Ministry of Economic Affairs and Digital Transformation (Ministerio de Asuntos Económicos y Transformación Digital).

The law establishes fines between EUR 1,200 and EUR 60,000, depending, among other things, on the size of the company, its turnover, repetition of infringements or the existence of other infringements. In serious cases, incompliant companies with an annual turnover of more than EUR 6 million can be punished with fines of up to EUR 300,000 per set of annual accounts not filed.

Continued violations can make the penalties add up, posing a significant financial risk to the company.

In practice, these fines have not been imposed, but this lenient application of the regulation may change at any time.

2. Closing of the Registry Sheet for Further Entries – Impediment to Corporate Transactions

If a company fails to submit its annual accounts in the following financial year, the Mercantile Register will close its registry sheet for further entries (so called cierre registral). This is a little-known but detrimental consequence of failure to deposit the annual accounts.

According to Article 378 of the Spanish Regulation on Mercantile Registers (Reglamento del Registro Mercantil), the closure of the register sheet implies that no further legal transactions relating to the company can be recorded, except for indispensable transactions such as e.g. the dismissal of directors, the revocation of powers of attorney, the appointment of liquidators or the dissolution of the company.

In such a case, the company can then no longer record resolutions on the following aspects, among others:

• Amendment of the articles of association
• Registration of new directors
• Change of registered office
• Capital increase or decrease
• Merger or demerger
• Registration of powers of attorney

This administrative blockade can have a negative impact on the company’s business activities and operations.

Failure to submit the annual accounts within one year does not result in a blockade if a certificate from the administrative body proves that the annual accounts have not been approved by the general shareholders’ meeting and the grounds for this lack of approval are explained.

3. Liability of the Directors

Failure to submit the annual accounts may affect not only the violating company but also its administrative body.

Under Spanish law, the directors are directly responsible for the preparation and submission of the annual accounts. If they fail to do so, they could be held personally as well as jointly and severally liable to the company, the shareholders and third parties.

In addition, Article 444.3 of the revised Spanish Insolvency Act (Ley Concursal, LC) provides that in insolvency proceedings, negligent insolvency (concurso culpable) is assumed if, in any of the three previous financial years, the annual accounts have not been prepared, not audited (if there is an audit requirement) or not filed with the Mercantile Register after their approval.

The classification of an insolvency as negligent can have serious consequences for the company’s directors, as they may be held liable for the company’s debts with their personal assets or be prohibited from managing the assets of others for 2 to 15 years.

4. Loss of Trust and Bad Image

In addition to administrative sanctions, failure to file annual accounts can also damage the company’s image vis-à-vis customers, banks, suppliers and, in general, third parties with an interest in the company.

Unfiled annual accounts may hurt their trust in the transparency or solvency of the company and could even be interpreted as a sign of risk or mismanagement. In light of increasing economic competition, these consequences could be more damaging to companies than the fines imposed by the administration.

5. Difficulties in Sale-and-Purchase Transactions and Investments

This loss of trust due to the failure to submit annual accounts can also cause problems for the future development of the company.

The lack of access to reliable information makes it difficult to carry out the due diligence measures required before entering into corporate transactions, such as the purchase of company shares or the entry of external investors, and thus it ultimately affects the negotiations with (potential) business partners.

Lack of trust can cause potential buyers or investors to significantly reduce their offer, demand additional guarantees or even withdraw from the transaction altogether, as they do not know the exact state of the company.

III. Remedying the Situation

In the event of a violation, the company must remedy the situation quickly in order to avoid more serious consequences. To do this, outstanding annual accounts must be prepared, approved and deposited with the Mercantile Register, even if the deadline has already passed. In the case of violations for three or more financial years, the Mercantile Register only requires the last three financial years to be filed.

Rectifying such a situation – even if done late – is always better than leaving the breach uncorrected.

IV. Conclusion

The obligation to file annual accounts with the Mercantile Register is not merely an administrative formality, but can have serious economic and operational consequences for the company and significantly impair its financing, growth and expansion opportunities.

Proper compliance with accounting and filing obligations in connection with the annual accounts is a sign of good corporate governance and credibility. Therefore, all companies, from small businesses to large corporations, should ensure that they strictly comply with this annual obligation.