Liquidation as a Way to the Dissolution of a Business Corporation

 

Why liquidation does not have to be the result of an unsuccessful business, but can represent a standard way of planned termination of a company 

What role the liquidator plays in the entire process and what duties and responsibilities are associated with this function 

How liquidation proceeds from the preparatory phase through the settlement of assets and creditors to the final deletion of the company from the public register 

 

Liquidation is often associated with unsuccessful business activities or economic problems of a business corporation. In practice, however, it can be a completely standard and pre-planned way of terminating the existence of a business corporation that has already fulfilled its purpose, is no longer needed within the group, or whose continued existence simply no longer makes economic or practical sense.

The mere termination of business or other activities is not sufficient for the dissolution of a business corporation. If a business corporation is to cease to exist without a legal successor, it is first necessary to properly settle its assets and debts, relations with creditors and other matters related to its previous activities. This is precisely the purpose of the liquidation process.

The specific course of liquidation may differ significantly depending on the legal form of the business corporation, the structure of its assets, existing liabilities or other specific circumstances. The liquidation of an “empty” company without assets and active contractual relationships may look very different from the liquidation of a company owning real estate and other assets that need to be appropriately settled before its dissolution.

In addition to the voluntary dissolution of a business corporation with liquidation, there are also cases where a court decides on its dissolution and orders liquidation. In cases stipulated by law, the court may do so even without a petition.

Purpose of liquidation

The purpose of liquidation is primarily to identify and settle the assets of the business corporation, satisfy creditors and maximise the liquidation balance. The liquidation process is intended to ensure that, before the business corporation is deleted from the public register (and thus ceases to exist), its liabilities are properly identified and settled and creditors are given a genuine opportunity to assert their claims. During the liquidation process, the liquidator must also pay attention to the economic situation of the business corporation. If the liquidator finds that the business corporation is insolvent, an insolvency petition must be filed without undue delay.

Creditor protection is one of the fundamental pillars of the entire liquidation process. The entry of a business corporation into liquidation is associated with an obligation to inform known creditors and publish the relevant notice so that creditors can assert their claims in a timely manner. This protection is also reflected in other liquidation rules. For example, the liquidation balance cannot be distributed among the shareholders or members of a business corporation before the rights of creditors have been settled in the manner prescribed by law.

Role of the liquidator

The liquidator plays a key role in the liquidation process. Once the business corporation enters liquidation, the powers of its statutory body pass to the liquidator to the extent necessary to fulfil the purpose of the liquidation. The liquidator represents the business corporation externally, determines the state of its assets and debts, informs creditors, sells or otherwise settles its assets, satisfies creditors and prepares the documentation required for the distribution of any liquidation balance. In performing this function, the liquidator is required to act with due managerial care, i.e. loyally, on an informed basis and in the defensible interests of the business corporation in liquidation. At the same time, the scope of the liquidator's actions is limited by the purpose of the liquidation. The liquidator's task is no longer to further develop the business or other activities of the business corporation, but to take steps aimed at the proper and transparent settlement of its affairs and its subsequent dissolution.

In practice, for example, the liquidator terminates existing business relationships, collects receivables or represents the business corporation before courts, administrative authorities and other institutions. The conclusion of new contracts is also possible if such contracts serve the purpose of the liquidation. Typically, these may include contracts relating to the sale of assets, archiving of documents, bookkeeping or other activities necessary for the proper completion of the liquidation.

At the same time, the role of the liquidator is associated with a significant degree of personal responsibility. The liquidator is responsible for ensuring that the liquidation is conducted in accordance with applicable law and with due managerial care. The liquidator is responsible for the proper performance of the function in the same way as a member of the statutory body of a business corporation. A breach of duties in the performance of the function may lead not only to removal from office, but also to an obligation to compensate for damage or other harm caused to the business corporation, its creditors or other affected persons. The scope of the liquidator's duties and responsibilities therefore places increased demands on the liquidator's expertise, prudence and ability to effectively coordinate the entire process in practice.

The role of a liquidator is generally not reserved for a particular profession or conditional upon specific professional qualifications. However, given the legal, accounting and tax complexity of the entire process, persons with appropriate expertise are often appointed to this role in practice, such as lawyers, insolvency administrators, tax advisers or other professionals with experience in corporate law, accounting or restructuring.

Course of liquidation

In practice, entry into liquidation may be preceded by a so-called preparatory phase, during which the activities of the business corporation are gradually wound down and the conditions for subsequent liquidation are prepared. At this stage, for example, business activities may be terminated or restricted, contractual relationships, including employment relationships with employees, may be settled, receivables may be collected and operating costs may be reduced. At this point, the statutory body is not yet subject to the special liquidation regime. A properly structured preparatory phase can therefore significantly contribute to ensuring that, following the subsequent dissolution of the business corporation and its entry into liquidation, the liquidation process itself proceeds efficiently and without unnecessary delays.

The liquidation process itself can then be divided into several consecutive steps. The first is the decision to dissolve the business corporation with liquidation and the appointment of a liquidator, which is generally entrusted to the highest body of the business corporation. The entry of the business corporation into liquidation is subsequently recorded in the public register, including the registration of the liquidator. From the moment it enters liquidation, the business corporation uses its name or business name with the addition “in liquidation”, thereby making it clear to third parties that it is proceeding towards the settlement of its liabilities and receivables and its subsequent dissolution.

Among the liquidator's first tasks are notifying the known creditors of the business corporation that it has entered into liquidation and publishing a notice inviting creditors to submit their claims through the Commercial Bulletin. At the same time, the liquidator determines the state of the business corporation's assets, prepares an inventory of assets and, in cooperation with tax and accounting advisers, ensures compliance with the related tax and accounting obligations. Another important obligation is the archiving of the business corporation's documents in accordance with the relevant legal regulations.

This is followed by the actual settlement phase of the liquidation. The liquidator terminates or otherwise settles existing contractual relationships, collects receivables, satisfies creditors and disposes of the assets of the business corporation in such a way as to fulfil the purpose of the liquidation. In doing so, the liquidator is required to act transparently, with due managerial care and with respect for the rights of creditors.

After the property affairs of the business corporation have been settled, the liquidator prepares a final report on the course of the liquidation, stating what steps were taken during the liquidation of the business corporation and how the liquidation estate was dealt with. At the same time, the liquidator prepares the financial statements and submits any proposal for the distribution of the liquidation balance to the body that appointed the liquidator. If the liquidation results in a liquidation balance, it may only be distributed after the conditions laid down by law have been met. The liquidation can then be completed by filing an application for the deletion of the business corporation from the public register.

Conclusion

The liquidation of a business corporation is therefore not merely a formal process leading to its deletion from the public register. It is a set of interrelated legal, accounting and tax steps aimed at properly settling the property affairs of the business corporation, protecting the rights of creditors and creating the conditions for its subsequent dissolution. The specific course of liquidation may vary depending on the legal form of the business corporation, the structure and extent of its assets and debts, or the nature of its existing contractual relationships.

Successful completion of liquidation therefore requires not only knowledge of individual legal obligations, but above all their correct timing and mutual coordination. An omission or incorrect procedure, even in a single area, can complicate the entire process, prolong it or increase its costs. This makes ongoing cooperation between the liquidator and legal, tax and accounting advisers all the more important, as they can identify individual risks in a timely manner and ensure that the necessary steps follow one another smoothly.

Within BDO, we have practical experience with the liquidation of various forms of business corporations, particularly limited liability companies and cooperatives, as well as with the liquidation of other legal entities, such as associations. Individual cases often raise specific issues that go beyond the standard course of liquidation. These may include the settlement of trademarks and other intellectual property rights, the distribution of non-monetary liquidation balances, the archiving of extensive corporate documentation or the coordination of the liquidation of a municipal company.