Insight
Directors of Spanish companies – financial reporting duties
July 2019
Many of the companies established in Spain are subsidiaries of foreign parent companies. Often, we find the board of directors of a Spanish subsidiary comprises members who are non-resident and have little experience of Spanish financial reporting obligations and are unaware of the potential liabilities of failing in their duties as directors. We’ve even seen examples of board minutes written in Spanish with no corresponding translation for foreign directors to read and sign. This is dangerous.
In this article we look at some of the basic financial reporting duties applying to directors of Spanish companies.
Preparing, publishing and depositing financial statements
The board of directors must prepare and sign financial statements within three months of the end of the company’s financial year. So, 31 March for a company whose financial year ends on 31 December. This date is important as it is the point at which directors, by definition, are aware of the contents of the financial statements and cannot claim otherwise. The financial statements contain the company’s:
- balance sheet
- profit and loss account
- statement of changes in net worth
- cash flow statement
- annual accounts report
The board of directors must also submit the financial statements for independent audit to verify their accuracy. Upon receiving the financial statements, the auditor has one month to produce a report.
Once published, the financial statements must be approved by shareholders no later than six months after the end of the financial year. So, in this example, by 30 June. Within one month of this deadline, 31 July, the company must deposit its financial statements with the Commercial Registry. At this point, the financial statements and all the information they contain, enter the public domain. Anyone who is interested can access an online copy by paying a fee of €10, useful for stakeholders with a financial interest in the company, such as banks, customers, suppliers, and employees.
The audit report
The audit report verifies the accuracy of the information in the financial statements. It is mandatory for Spanish companies meeting two of the following conditions:
- assets exceeding €2.8m
- turnover exceeding €5m
- more than 50 employees
However, although the audit report verifies the financial statements, it does not protect the board of directors against liabilities that may arise as a result of the published information – there are certain responsibilities that are not removed by the audit report or shareholder approval.
Responsibility to monitor the company’s financial position
Perhaps the most important responsibility is one that requires directors to ensure the financial health of a company. If losses reduce the net worth of a company below one-half of the issued share capital, the company is in a situation of legal (mandatory) dissolution, and the board of directors must act to rectify the situation by injecting capital or refinancing. The only alternative is to dissolve the company by law.
If there is no agreement to rectify the financial situation of the company, the board of directors must call a meeting of shareholders to adopt the dissolution agreement. This meeting must happen within two months of the directors becoming aware of the situation. In our example, as the directors, by definition, become aware on 31 March, the meeting must take place by 31 May.
If the directors do not fulfil their obligation, they become personally liable for any debts arising after this date. This sanction can also be applied if the directors do not deposit the financial statements with the Commercial Registry.
It is important to be aware of these potential liabilities given that any creditor can check a company’s financial position and, if necessary, claim personally against the directors for repayment of debts.
About the author
Jaime J. Navarro
Zaragoza, Spain
Jaime is a partner of Navarro Llima Abogados S.L., Zaragoza, a member of Russell Bedford International, and he specialises in tax and commercial law. Jaime has particular experience in international transactions and the provision of advice to Spanish branches or subsidiaries of overseas companies. He has worked as consultant to Spanish regional governments in attracting foreign capital and investments. He is a member of the Association of Certified Fraud Examiners (ACFE), International Association of Young Lawyers (AIJA) and the International Fiscal Association (IFA). jnavarro@navarrollimaabogados.com