How can an enterprise withdraw from the market through liquidation?
What is liquidation?
Enterprise liquidation aims to terminate the existence and related rights and obligations of an enterprise. It can occur by a decision of the owner or it may occur when an enterprise is no longer qualified to exist and is forced to liquidate at the request of the appropriate state agency. We only discuss liquidation by the owner.
Voluntary liquidation:
This occurs upon the owner's decision. It is by resolution of the Board of Members and the owner (for limited liability companies), the owner (for sole proprietorships) or a General Meeting of Shareholders (for joint stock companies).
There can be many reasons: business is not good; the owners have no interest in pursuing the business; company assets have been sold – or other reasons decided by the owner. In brief there is no compulsion. Liquidation is voluntary. The owners decide to terminate the business and liquidate the enterprise.
Compulsory liquidation:
- The enterprise no longer meets the legally mandated number of members;
- Its Business Registration Certificate expires or is revoked;
- Liquidation is mandated by a court decision when the enterprise commits an illegal act or fails to submit mandatory reports and other reasons;
- Based on a decision of the authorities, the business owner is required to liquidate.
Liquidation conditions?
We focus only on voluntary liquidation.
A prerequisite to liquidation is the ability of the company to pay its debts and fulfill its obligations. An enterprise that cannot pay its debts, cannot be liquidated. It must go through bankruptcy. At the time of liquidation an enterprise must ensure that there are no pending judicial or arbitral disputes.
Decision to dissolve
The owners themselves organize the liquidation and adopt a resolution to liquidate or to dissolve. The contents must include matters such as: (i) reasons for liquidation; (ii) time periods and procedures required to pay debts and to liquidate; (iii) plan to handle obligations arising from existing labor contracts; (iv) consent of the owner.
Implementing the liquidation decision
After adopting a resolution to liquidate, the owner must take several steps:
- Notify the licensing authority, tax registration agency, employees in the enterprise of the decision to liquidate;
- Publicize liquidation by posting information on the National Business Registration Portal; placing a public notice at the head office and branches of the enterprise; and
- Liquidate assets and settle outstanding debts according to the debt settlement plan which it adopts.
The debts of the enterprise must be paid in order of priority:
- Arrears of salary, severance allowance, social insurance, health insurance, unemployment insurance and any employee benefits under collective labor agreements and labor contracts;
- Tax liabilities; and
- Debts to individuals and businesses.
The manager of the company is personally liable for damages caused by non-performance of the company's obligations.
Voluntary termination of the operation of an enterprise by liquidation is dependent on the ability of the enterprise to pay its debts. This is to avoid cases where an enterprise liquidates in order to avoid its debts and obligations.
Once the costs of liquidation and the company's debts have been paid, the remainder can be divided among the owners according to contributed capital and shares.
Completing of the liquidation process
Liquidation is complete when the business registration agency (Department of Planning and Investment (DPI)) posts a certification of liquidation on the National Business Registration Database. From that moment, the enterprise's existence terminates.
The whole process of liquidation has variables, depending in part on the diligence of the owners to move the process along, but the process can take +/- six months.
Prohibited actions after a decision to dissolve has been made by the owner:
As soon as there is a resolution by the owners to dissolve the enterprise, the enterprise and its manager are prohibited from:
- Concealing or disguising assets;
- Denying or reducing the creditors' legitimate claims to payment;
- Converting unsecured debts into debts secured with the enterprise's assets;
- Concluding new contracts, except for those necessary for dissolution;
- Pledging, donating, leasing of assets;
- Terminating effective contracts; or
- Raising capital in any form.
A manager who commits a prohibited act, and, depending on the nature of the act, may be administratively sanctioned or examined for possible criminal liability. If culpability is found, the manager must compensate for damages.
The steps to liquidate are relatively clear, but there is a need to follow a mandated process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
