Most business owners know that a company’s health depends largely on the balance between what comes in and what goes out. When that balance breaks down, cash flow is the first thing to suffer, and a business can end up profitable on paper but without the cash to pay its bills. If that cash shortage drags on, the company can slide into insolvency, which may trigger a legal duty to file for insolvency proceedings and expose the director to personal risk.
That’s why it’s essential to keep a close eye on both what the company is owed and what it owes. In this article, we look at some basic steps that can help you do that more effectively.
- Getting paid on time: why controlling late payments matters for the company and its director
An unpaid invoice isn’t just a hole in your cash flow. It’s a claim that can expire, VAT you’ve already paid to the tax authorities and may never get back, and sometimes the first step toward personal liability for the director.
In practice, many unpaid invoices are simply left alone, either to avoid straining the relationship with the client, because “they’ve always paid in the end,” or because chasing small amounts doesn’t seem worth the time and effort. But it all adds up, and more often than we’d like, debtors won’t make much effort to pay unless they’re formally asked to. On top of that, time is always on the debtor’s side.
Time is against you: the limitation period
The first rule is simple: don’t let time pass without formally demanding payment. The right to claim a debt is subject to deadlines, and once they expire, the claim becomes time-barred and can no longer be pursued.
In Catalonia, the Catalan Civil Code sets a general limitation period of 10 years for claims arising from a contract. However, some obligations expire after just 3 years:
- Periodic payments due annually or more frequently (fees, rent, utilities).
- Payment for services rendered and work carried out.
- Payment of the price in consumer sales.
- Claims for non-contractual damages.
Outside Catalonia, the Spanish Civil Code applies, with different time limits. So, it’s important to know which rules govern your contracts with each client to apply the correct limitation periods.
How to stop the clock
The limitation period is interrupted by a written demand that makes it clear you intend to collect the debt. An email or WhatsApp message may do the job, but the safest option is a method that provides legal proof, such as a burofax (a certified letter with proof of delivery and of its content), certified email, or a notarial demand. Verbal demands, on the other hand, don’t leave enough evidence and don’t interrupt the limitation period.
Ways to recover the debt
The usual route has two or three steps:
- Out-of-court demand. A burofax or other certified demand sent by the company itself and signed by its director interrupts the limitation period and makes your intention to collect clear, without the apparent “aggressiveness” of going straight to a formal dispute resolution process. That said, a demand letter sent by a law firm often speeds up payment, or at least gets a response from the debtor, even if only to negotiate or arrange payment.
- ADR (alternative dispute resolution, known in Spain as MASC). Under new rules that came into force in April 2025, before filing a civil claim you must first make a genuine attempt to resolve the dispute out of court. This can take several forms: conciliation, mediation, negotiation, a binding offer, or arbitration. In most cases it’s a mandatory prerequisite for going to court (with certain legal exceptions), and your claim must show that you went through this process with a real intention of reaching an agreement.
- Court action. If ADR doesn’t work, you can go to court to recover the amount owed, either through the fast-track payment procedure (procedimiento monitorio) or through ordinary or summary proceedings, depending on the amount claimed.
Don’t let debt pile up
The second rule is not to let unpaid amounts build up into a large sum. This applies not only to overall late payments, when lots of clients aren’t paying, but especially when a large share of the debt is concentrated in just a few clients.
That kind of concentration is often a sign that those clients are in real financial trouble and may be insolvent, in which case the debt will likely never be recovered, or only a very small part of it.
In these situations, you should consider suspending the service or even terminating the contract and demanding payment, to stop the amount from growing.
Cutting your losses: recovering VAT on unpaid invoices
When an invoice goes unpaid, the company has often already paid the VAT on it to the tax authorities. To reduce the loss, even if only temporarily, the law allows you to recover that VAT if the debt is deemed uncollectible. But there are strict timing and formal requirements:
- Waiting period: one year must have passed since the VAT became due without payment. Businesses with annual turnover below €6,010,121.04 can opt for a six-month period instead.
- Prior demand: payment must have been demanded through a method that provides legal proof, such as a burofax or notarial demand, or through the courts.
- Deadline to act: the corrective invoice must be issued within six months after the end of the waiting period, and the Tax Agency must be notified within one month of issuing it.
Bear in mind that VAT can’t be recovered on debts that are secured or insured (for the covered portion), debts between related persons or companies, or, generally, debts owed by public bodies.
Finally, if you do end up being paid in full, you’ll need to issue a new corrective invoice and declare the VAT again.
If these formal and timing requirements aren’t met, you permanently lose the chance to recover the VAT.
- The company’s own debt and the director’s liability
Late payments often have a knock-on effect: if you don’t get paid, you eventually can’t pay others. And unmanaged debt can put at risk not only the company but also the director’s personal assets.
The first step is to work out what type of debt you have (public or private) and how old it is, so you can manage or negotiate payment, while keeping in mind the consequences in each case.
Debt with the tax authorities or Social Security. If the company can’t pay a tax or social security contribution, the right move is to apply for a deferral or instalment plan. Doing nothing can lead the authorities to shift liability for the debt onto the director through administrative proceedings (even if the company has filed for insolvency). It can also count as grounds for the insolvency to be deemed culpable due to a late filing, if tax or social security payments have gone unpaid for more than three months.
Debt with suppliers and other creditors. Creditors can take legal action and, in certain circumstances set out mainly in the Spanish Companies Act, may try to extend their claim to the director for mismanagement or breach of their duties. It’s therefore important to try to reach agreements that help manage the debt and ease any cash-flow pressure the company may be under.
Risk of insolvency proceedings. When the company can no longer regularly meet its payments, the director must file for insolvency within two months. If they don’t, creditors may in some cases force the company into insolvency, and if the insolvency is declared culpable, the director may have to answer with their personal assets.
Criminal risk. Keep in mind that, depending on the circumstances, owing more than €120,000 to the tax authorities or more than €50,000 to Social Security could even amount to a criminal offence. This doesn’t happen with every unpaid debt, but it clearly puts the director at risk.
Warning signs on the balance sheet
Certain accounting situations are real red flags that the company and its director need to watch, because if they’re not corrected, the director may become liable for some of the company’s debts:
- Negative equity.
- Share capital below the legal minimum (€3,000 for a limited company).
- Losses that bring net equity below half of the share capital.
In these situations, you need to act and restore the balance. If it’s a temporary cash-flow squeeze, options include restructuring the debt or corporate measures such as shareholder contributions or capital increases. If the insolvency can’t be reversed, the right path is to file for insolvency.
Failing to file annual accounts also has consequences: it leads to penalties and the company being blocked at the Companies Registry, and in insolvency proceedings it’s an indication that, although it can be rebutted, could be decisive in having the insolvency declared culpable.
Conclusion
Chasing payments on time protects your cash flow, lets you recover the VAT you’ve already paid, and stops collection problems from turning into a risk for the director. The key is to act early and keep a record of every step.
At addwill, we can support you throughout the process, from recovering debts to managing your company’s own debt and protecting the director’s position. If you have any questions, please don’t hesitate to get in touch.
Author:
Núria Flaquer Molinas
Partner, Litigation Department, addwill