Liquidation is becoming an ever more popular method for getting rid of companies in which the owner/shareholder is no longer interested. In the past, obsolete companies which no longer pursued any operations were relatively frequently allowed a continued existence as an empty shell, but an increasing number of entrepreneurs nowadays prefers to voluntarily liquidate any company which they no longer need, and to delete it from the Commercial Register. The following article addresses the process for liquidating the most popular form of companies in the Czech Republic – the limited liability company pursuant to Czech law („s.r.o.“).
For most procedures governed by the law of companies, shareholders may simply refer to the Corporations Act (Act No. 90/2012 Coll.), but liquidation requires that one pulls down the Civil Code from the shelves (i.e., specifically, the „New“ Civil Code – Act No. 89/2012 Coll.). Its Sections 187 – 209 describe the procedure for liquidating legal entities, and fully apply to commercial companies. With respect to the liquidation proceeds and the liability of the former shareholders after the company has ceased to exist, one needs moreover to take into account the provisions of Sec. 37 et seq. of the Corporations Act. Other relevant legislation includes e.g. the General Fiscal Code (Act No. 280/2009 Coll.), or the Archive and Records Management Act (Act No. 499/2004 Coll.).
The liquidation of a company seeks to settle all debt and all claims of the company, and to have it deleted from the Commercial Register. As a rule, this entails laying off the entire staff, selling off all business assets, and settling all liabilities. In a sense, striking the „empty“ company from the Commercial Register afterwards is only a final formality.
Before a company may be dissolved and liquidation may start, one should consider whether such liquidation may constitute a breach of standing obligations of the company. Especially if the company has been the recipient of subsidies, we recommend reviewing the terms on which the relevant funds were made available. In the overwhelming majority of cases, liquidating a company during the minimum holding period during which the subsidized project must be sustained will qualify as a breach of budgetary discipline, and trigger the obligation to repay the received investment incentives in their entirety.
In commercial practice, companies will often already have no employees and have ceased to engage in economic activity before they enter into liquidation; in those cases, their liquidation is a purely formal corporate-law and accounting procedure.
Liquidation – how is it done?
Any liquidation begins with the dissolution of the company. The company may be dissolved by the shareholders, acting on their mutual understanding, or (where provided for by the memorandum of association) by a decision by the general meeting (or, in the case of a one-person company, by the sole shareholder). The dissolution of the company must always be recorded in a notarial deed. If the dissolution is being decided by the general meeting, then a qualified majority of at least 2/3 of all votes must be cast in favor of the relevant resolution by force of law (subject to an even higher majority as may be required by the MoA).
As the company is being dissolved and enters liquidation, a liquidator must be appointed. The memorandum of association may (and in most cases will) stipulate that the liquidator is to be appointed by the general meeting; otherwise, this task falls to the managing directors.
If a legal entity enters in liquidation without a liquidator having been instated, the court will appoint one ex officio, i.e., even without being asked to do so. In such a case, the powers and duties of the liquidator must be exercised by all members of the statutory body (i.e., here, by all managing directors acting collectively) unless and until the court has appointed a liquidator. The court will take into account proposals brought forward by the company when making its decision. If no such proposals were made (or if they proved unsuitable), the court may appoint one of the current managing directors as liquidator even without their consent; nor may the thus appointed liquidator step down from his or her office. If the court finds that none of the members of the statutory body satisfy the requirements for such appointment, it will choose a liquidator from the ranks of chartered insolvency trustees.
As of the day on which it is being dissolved, the company enters into liquidation. For practical reasons to do with easier accounting, that date is usually set to be the first day of a given month, as the liquidator must by law prepare an opening balance as at the first day of liquidation as well as a list of the company’s assets. Also, closing statements must be prepared as at day preceding the date of entry into liquidation. Within 30 days from entry into liquidation, a proper tax return must be filed with the finance office.
Further, the liquidator must promptly arrange for entry of the liquidation in the Commercial Register. These days, this duty is usually being discharged by the notary public who has been asked to draw up the decision on the dissolution of the company. From then onward, the company must use its company name with the add-on „v likvidaci“ (in liquidation).
Yet another duty of the liquidator concerns the notification of all known creditors of the company. Unknown creditors of the company must be alerted to the liquidation by placing a notice in the Commercial Gazette in which they are called upon to register their claims. This announcement must be published in the Gazette at least on two separate occasions with at least two weeks apart. In the announcement, the liquidator sets a time period during which creditors must register their claims, and which must not be shorter than three months from the day on which the announcement was published for the second time.
Labor-law issues are a chapter unto itself. In this respect, the lawmaker has made the liquidator’s life a little easier by recognizing the dissolution of the employer as regular grounds for termination in the Labor Code (Sec. 52 (1) (a)). (Of course, employees become entitled to severance pay in such a case.) Moreover, termination on grounds of the employer’s dissolution is not limited by any protective period, so that the employer may lay off the entire staff without having to take into account whether someone is on leave for temporary work incapacity or on maternity leave. Having said all that, one should consider that the termination of all employees may possibly qualify as a ‘mass layoff’ within the meaning of Sec. 62 of the Labor Code. Where this is the case, the law imposes further obligations on the employer, i.e., among others, broad information duties vis-a-vis trade unions and via the labor office. In addition, collective bargaining agreements may contain special restrictions for the event of a mass layoff.
Another aspect of the liquidation procedure is the archiving of company documents. The to-be-liquidated company must negotiate the proper safekeeping of its records with the competent archiving service, and ask for relevant documents to be exempt from the ordinary destruction process. Since 1 January 2014, the motion for deletion of the company from the Commercial Register need no longer be accompanied by any certificate from the archiving service confirming that said negotiations about the safekeeping of company records took place; for the rest, though, the duties in connection with the storage and archiving of documents continue to apply.
Completion of the liquidation procedure and expiry of the company
Once all legal and financial relations of the company have been sorted, the liquidation may be brought to an end. The liquidator shall issue a final report in which they summarize the course of the liquidation and, if it resulted in a surplus, propose how to dispose of the liquidation proceeds. As at the same day, the accounts are being closed and final financial statements are being drawn up. Within 15 days from the day on which the proposal for the appropriation of liquidation proceeds was made, the company must file a proper tax return.
The financial statements, the liquidator’s final report, and the proposal for appropriation of the liquidation proceeds must be submitted for approval to a corporate body of the liquidator’s choice. As a rule, this will be the general meeting; however, the said documents may also be approved by the managing directors of the to-be-liquidated company or, in the extreme case, by the court. Upon distribution of the proceeds, the liquidation is considered complete. However, the liquidator must observe certain restrictions when it comes to the distribution of the liquidation proceeds. Specifically, the proceeds may not be paid out (and no advances on future distributions may be granted) unless and until the receivables of all registered creditors have been satisfied.
Within thirty days from completing the liquidation, the liquidator must file the motion for deletion of the company. Aside from the documents mentioned earlier, this motion must be accompanied by the same financial documents whose publication in the roll of deeds is mandatory for the company, by a notice from the finance office to the effect that the office does not object to the company’s deletion, and by proof of the fact that the liquidation was properly announced in the Commercial Gazette. Once the company has been deleted from the Commercial Register, it ceases to exist.
The entire procedure for liquidating a company, from taking the decision to do so until the actual deletion in the Commercial Register, can hardly be accomplished within less than four months; for large and active corporations, it can easily take years.
Source: Civil Code (Act No. 89/2012), Corporations Act (Act No. 90/2012), General Fiscal Code (Act No. 280/2009), Archiving and Records Management Act (Act No. 499/2004), Labor Code (Act No. 262/2006)