The formulation, approval and presentation of the company’s annual accounts is one of the main legal obligations of commercial companies, such as limited liability companies and public limited companies.
These are different procedures, but they require a certain amount of planning, knowledge and compliance with various formalities that may result in significant costs, risks and liabilities for the directors in the event of non-compliance.
In addition to the applicable regulations, which we will analyse below, these processes are usually regulated in the articles of association and in the shareholders’ agreement, as they may imply the recognition of rights or obligations towards shareholders, employees or third parties, such as the distribution of dividends, the payment of phantom shares or the obligation to liquidate the company.
However, some companies choose to breach these obligations, for various reasons, including their willingness to hide business information from competitors and customers, when things are going well or when things are going badly.
What risks does a company assume if it fails to prepare, approve or file annual accounts, what is its liability, and how does this affect directors, officers and other senior management?
Below you will find all the information you need.
The annual accounts: what are they?
The annual accounts are a set of accounting documents that compile the economic and financial information of a company for a given financial year. These documents comprise the balance sheet, the profit and loss account, the statement of changes in equity, the cash flow statement and the notes to the financial statements.
Depending on the size and characteristics of your company, the procedure to be followed and the format of each of these procedures can vary significantly, so it is necessary to find out before starting them.
Likewise, if the company is obliged to audit its annual accounts, or has decided to do so voluntarily, this requirement must be taken into account when carrying out each of the procedures.
Deadlines for filing annual accounts
The Spanish Companies Act imposes on the company’s management body (e.g. the directors or the board) the obligation to prepare, within a maximum period of three months from the end of the financial year, the annual accounts, the management report and the proposal for the allocation of profits, as well as the consolidated accounts and management report (article 253 LSC). Therefore, if the financial year closed on 31 December 2022, the deadline for preparing the annual accounts was 31 March 2023.
If you have not prepared the annual accounts within the legal deadline, it is important to take steps to remedy this. We therefore recommend that you prepare your annual accounts as soon as possible. Although you may receive penalties or fines for the delay, it is better to file your accounts late than not to file them at all.
Some companies decide to pre-date their annual accounts, i.e. to approve them out of date, indicating an earlier date. This is a malpractice that in some cases may even lead to the commission of a criminal offence, and we do not recommend doing so.
Once the annual accounts have been prepared, they must be approved by the general meeting within six months of the end of the financial year. Therefore, if the financial year closed on 31 December 2022, you will have until 30 June 2023 for the annual accounts to be approved.
It is important to note that the articles of association may establish a deadline for convening the general meeting that is longer than that provided for by law, so this deadline must be taken into account when convening and holding the general meeting.
Once the annual accounts have been approved, they must be filed with the Companies Register of the company’s registered office, together with a certificate of the resolutions of the shareholders’ meeting approving the accounts and the allocation of profits.
The deadline for filing the annual accounts is one month from the date of their approval. Therefore, if the annual accounts are approved on 30 June 2023, the annual accounts must be filed before 31 July 2023 (art. 365 RRM and art. 279 LSC).
Consequences of non-compliance with the approval of the annual accounts
Failure to comply with the obligations relating to the filing of annual accounts can have serious consequences for companies and their directors or advisors, including the following:
- Failure to comply with the obligation to deposit, within the established period, the aforementioned documents, will give rise to the imposition on the company of a fine of between 1,200 and 60,000 euros by the Instituto de Contabilidad y Auditoría de Cuentas, following the investigation of proceedings in accordance with the procedure established by regulations, in accordance with the provisions of the Ley de Régimen Jurídico de las Administraciones Públicas y del Procedimiento Administrativo Común (Article 283 LSC).
- When the company has an annual turnover in excess of 6,000,000 euros, the fine limit for each year of delay shall be increased to 300,000 euros (article 283 LSC).
- If one year has elapsed since the end of the financial year without the duly approved annual accounts having been filed with the Register, the Commercial Register is closed. This means that the Commercial Registrar will not register any act that takes place after that date until the deposit has been made beforehand. Exceptions are deeds relating to the dismissal or resignation of directors, managers, general managers or liquidators, and the revocation or renunciation of powers of attorney, as well as the dissolution of the company and the appointment of liquidators and entries ordered by the judicial or administrative authorities (Article 378.1 of the Companies Register Regulations). By way of example, amendments to the articles of association, capital increases, changes of registered office and other decisions which directly affect the company’s relationship with third parties and which may give rise to liability for the company’s administrators or directors will not have access to the register.
- Failure by the director to present the annual accounts means that he has not acted with the due diligence of an orderly businessman (Article 225 LSC). This non-compliance may entail liability for the company’s debts, so that the other shareholders, employees and creditors may take direct action against the non-compliant directors and board members to demand payment of their debts to the company.
- If the company is in a situation of insolvency, the lack of diligence on the part of the administrator in the presentation of the accounts will also increase the liability of the administrators and directors in the event of insolvency, as the Insolvency Act establishes that the failure to prepare the annual accounts, to submit them to an audit if obliged to do so, or the failure to file them with the Commercial Registry in any of the last three financial years prior to the declaration of insolvency, are considered to be a case of culpable insolvency.
- Finally, the failure to prepare, approve or file the annual accounts may lead to a breach of the obligations assumed in the shareholders’ agreement by the administrators or directors; this breach may have different consequences, from the loss of the company’s shares to the obligation to compensate the company or the assumption of personal liabilities derived from these debts.
Article written by:
Luis Gosálbez
Managing Partner Metricson
About Metricson
Metricson is a pioneer in legal services for innovative and technology companies. Since its inception in 2009, it has advised more than 1,400 companies from 14 different countries, including startups, investors, large corporations, universities, institutions and governments.
If you would like to contact us for any aspect of legal advice, please do not hesitate to write to us at contacto@metricson.com. We look forward to talking to you!