Analysis of Corporate Formation and Liability in a Case Study: Alicante Repair Shop
COURSE 5: Case Study – Alicante Repair Shop
Formation and Liability Issues
Several members decided to form a corporation for limited liability, choosing the name “Alicante” for their repair shop. The capital amount is 100,000 and is distributed proportionally among the partners according to the appropriate share value. Each of the 25% of partners supports actions imposed by a higher value (there are shares of different values).
The issued articles of incorporation took a year and a half to register in the Register. During this time, the two directors executed several acts and contracts without obtaining consent from the company’s governing bodies (Board Meeting) and without convening a shareholders’ meeting. Additionally, 5% of shareholders transferred their shares without informing the company. The articles of association did not limit share transfers and allowed the release of only a quarter of the capital figure upon incorporation. The clause literally stated: “The remaining parts of the share capital to be provided by partners will be charged to the potential benefits gained by the SA in the third year.”
Questions and Analysis
1. Grounds for Revocation and Potential Solutions
Compliance with the Deadline for Entry in the Register of Companies: The deadline for registration in the Commercial Register has been missed. When more than one year has elapsed since the declaration of Scripture without applying for registration, any member may urge the dissolution of the Company Formation and require the return of their contributions.
This defect could be remedied by registering the Company in the Commercial Register. However, in this case, entry would not oblige the Company for acts engaged during the period of irregularity; partners, managers, and representatives are bound by any acts done during this period. (Art 16.2 of the LSA).
2. Irregular Society or Society in the Making?
Given the year and a half delay since the deed without registration, we are dealing with an Irregular Society. The deadline for registration has been missed, and the rules of the partnership apply.
Article 16 of the LSA – Irregular Society:
- If the society is not registered within one year from the grant writing without having applied for registration, any partner may request the dissolution of the company in training and require liquidation of assets after the return of their contributions.
- In such circumstances, where the corporation has commenced or is continuing its operations, the rules of the partnership or, where applicable, the civil society shall apply. The third paragraph of the preceding article shall not apply to subsequent registration of the society (which states): Once registered, the company shall be bound by the acts and contracts referred to above. Also, be bound by society that accepts such acts within three months from registration. In both cases, the responsibility of partners, administrators, and representatives referred to above will cease.
3. Responsibility for Registration Delay
The responsibility for the registration delay lies with both the Directors and the founding partners. The Companies Act obliges both to file the registration in the Commercial Register within two months from the granting of Scripture. It also provides that for breach of this obligation, they are jointly liable for damages (Article 17 of the LSA).
Article 17 – Application for Registration:
- The founders and administrators of the society have the powers necessary for the filing of the articles of incorporation at the Companies Registry and, where appropriate, in the Property and to request or the liquidation and to the payment of taxes and expenses.
- The founders and directors of the company must submit to registration in the Commercial Register of the registered office of incorporation within two months from the date of grant and are jointly liable for damages caused by them by breach of this obligation.
4. Company Name “Alicante” and Negative Certificate of Registration
In principle, the name “Alicante” is free. The law only requires that the name includes the letters SA while prohibiting the adoption of a name identical to that of other pre-existing societies (art 2.2). Moreover, the Commercial Register (Article 407 and 408) specifies the circumstances involving identity of names and includes several general rules on their possible formation. For example, it prohibits misleading names or confusion about the identity or nature of the society or making reference to an activity not included in the object.
Negative Certification: A negative certification from the Central Mercantile Registry is necessary. Article 413 of the Mercantile Registry Regulations states that articles of association of companies and other entities cannot be approved for registration or name change without submitting a notary’s certificate stating that the chosen name is not already registered.
Relevant Legal Articles
- Article 2 of the LSA – Designation:
- The name of the company must necessarily include the words “limited company” or its abbreviation “SA”.
- It may not adopt a name identical to another existing company.
- Article 407 of the Commercial Registration Regulations – Prohibition of Identity:
- Companies or entities whose name is identical to any of the indications included in the section names from the Central Business Register may not be entered in the commercial register.
- Even if the name does not appear in the Central Trade Register, the notary is not permitted, nor the Registrar shall record, companies or entities whose names they know by reputation that matches that of other pre-existing entities, whether or not of Spanish nationality.
- Article 408 of the Mercantile Registry Regulations – Concept of Identity:
- Identity is understood to exist not only in the event of total and absolute coincidence between denominations but also where any of the following circumstances:
- Using the same words in different order, gender, or number.
- Using the same words with the addition or deletion of terms or generic terms or ancillary, or articles, adverbs, prepositions, conjunctions, accents, hyphens, punctuation, or other similar particles, with little significance.
- The use of different words having the same expression or obvious phonetic similarity.
- Identity is understood to exist not only in the event of total and absolute coincidence between denominations but also where any of the following circumstances:
This analysis highlights the importance of adhering to legal requirements during company formation and emphasizes the potential liabilities associated with non-compliance.