How does the dissolution of a company without liquidation work?

What is the difference between dissolution with and without liquidation?

The fundamental difference between dissolution with and without liquidation lies in what happens to the company’s assets. In the case of liquidation, the company’s financial affairs are settled through a liquidator. In the case of a transformation leading to the company’s dissolution without liquidation, the assets are transferred to a legal successor or an acquiring partner.

Not sure which option for dissolving a company is right for your situation? An attorney can help you assess the appropriate course of action, prepare the transformation plan and necessary documentation, and ensure that the changes are entered in the Commercial Register.

What does it mean to dissolve a company without liquidation?

Dissolving a company is one of the major steps in a company’s life cycle. In most cases, a company is dissolved through liquidation, during which the company’s assets and liabilities are settled before it ceases to exist entirely. However, there is also the alternative of dissolving a company without liquidation, which allows for a seamless transfer of assets, rights, and obligations to a legal successor. The process of dissolving a company without liquidation is often more efficient and faster than traditional liquidation.

Let’s first take a brief look at liquidation. This is the process by which a company is dissolved without a legal successor. This means that its assets are sold off or otherwise converted into cash, and the proceeds are then used to settle its liabilities. The remaining assets are then divided among the shareholders. In contrast, when a company is dissolved without liquidation, its assets are transferred to another entity, so all of the company’s rights and obligations continue, but under a different owner.

When is it appropriate to dissolve a company without liquidation?

Dissolving a company without liquidation is generally most suitable for companies that want to optimize their structure, reduce their administrative burden, or achieve tax savings. This procedure can be applied to various types of business entities, including limited liability companies (s. r. o.) and joint-stock companies (a. s.).

How can a company be dissolved without liquidation?

There are several ways a company’s status may change if it is not liquidated. These include:

• Merger: In this case, two or more companies merge, with one or more of them ceasing to exist and their assets being transferred to the successor company.
• Transfer of Assets to a Shareholder: The existing shareholders decide to transfer all of the company’s assets and liabilities to a single shareholder, thereby withdrawing from the company without having to liquidate it.
• Division: A company may also be divided into multiple successor companies, with the assets of the original company distributed among the successor companies.

You can read more about the various forms of company dissolution without liquidation later in this article.

What law governs the dissolution of a company without liquidation?

The general rules for the dissolution of a legal entity are set forth in the Civil Code. It is based on the principle that the dissolution of a legal entity is followed by liquidation, unless its entire assets are acquired by a legal successor or the law provides otherwise. In the case of a transformation, the legal entity is dissolved without liquidation on the effective date of the transformation.

For business entities, the Act on the Transformation of Business Entities and Cooperatives is therefore key. It governs, for example, mergers, divisions, and the transfer of assets to a shareholder, including the preparation of a transformation plan, creditor protection, and the registration of the transformation in the Commercial Register. In addition, the Act on Business Corporations and the rules governing the maintenance of public registries also apply.

Why are companies dissolved without going into liquidation?

One of the reasons why business owners choose to dissolve a company without putting it into liquidation is for economic reasons. By taking this step, business owners seek to optimize their business structures and reduce their administrative burden. By merging with another company or splitting up the existing one, they can achieve more efficient management, make better use of resources, and reduce the costs associated with operating multiple entities.

Tax considerations also come into play. Corporate reorganizations can yield significant tax savings for owners, for example, through the optimization of tax obligations or the utilization of tax losses. In this case, however, it is necessary to very carefully analyze all tax implications and consult with attorneys specializing in tax law regarding the planned steps. If you need advice, we’d be happy to help.

And then there are also legal and business reasons. Restructuring within a corporate group or a merger with another company can improve a company’s competitive position in the market. This can also allow the company, for example, to expand its range of products or services and strengthen its capital base. Often, these steps also simplify the organizational structure and improve corporate governance.

However, dissolution without liquidation is not always appropriate. If a company has excessive liabilities, is currently involved in litigation, or faces other legal problems, it will likely have difficulty finding new owners or merging with another entity. In such cases, liquidation may be a much more transparent and fair solution for all parties involved.

From practice: When preparing for a corporate transformation, it often becomes clear that the decision is not merely a choice between liquidation and dissolution without liquidation. It is also necessary to review in advance contracts, loans, ongoing disputes, employee relations, and restrictions on the transfer of certain rights. Failing to take these interdependencies into account can significantly complicate the entire process.

Are you considering whether to merge, split, or transfer the company’s assets to a shareholder? We’ll help you compare the legal implications of each option and prepare the reorganization plan and related documentation so that each step follows on from the next correctly.

Company Merger

As mentioned above, one possible outcome for a company is a merger. This takes the form of either a consolidation or a merger by absorption.

In the case of a consolidation, one or more companies cease to exist and their assets are transferred to another existing company. In the case of a merger , two or more companies cease to exist and a new company is formed, to which their assets are transferred.

The merger process is not simple; first, a merger plan must be prepared. This plan must include the details required by law, such as the identification of the participating companies, the exchange ratio of shares, and the date from which the transactions of the dissolving companies are considered, for accounting purposes, to have been carried out on behalf of the successor company. Furthermore, it is necessary to inform the shareholders and creditors that a merger is planned. This is followed by a notarial deed and the filing of an application with the Commercial Register. We discussed mergers in greater detail in our article on corporate transformations.

Transfer of Assets to a Sole Shareholder

The transfer of assets to a shareholder does not mean that the company must have only one shareholder. In the case of a limited liability company, a shareholder whose contribution amounts to at least 90% of the registered capital and simultaneously represents at least 90% of the voting rights may, under the conditions prescribed by law, acquire the company’s assets. The other shareholders are entitled to a cash settlement corresponding to the fair value of their shares. The specific conditions vary depending on the company’s legal form.

How does the transfer take place?

1. Drafting the asset transfer plan – The current owner must prepare a document containing a detailed description of the transfer of assets, rights, and obligations to the shareholder.
2. Approval by the general meeting —The shareholder formally approves the transfer of assets. This step is recorded in a notarial deed.
3. Protection of creditors – The company must ensure the protection of creditors, who may file objections to the transfer if they fear that their claims will become uncollectible.
4. Filing an Application for Entry in the Commercial Register – After approval and fulfillment of all legal requirements, the change is entered in the Commercial Register.

Thus, upon transfer, all of the company’s assets pass to the shareholder without the need for further settlement. However, the shareholder may be required to pay a tax on the acquisition of assets or face other tax obligations, depending on the specific situation. At the same time, the shareholder may exercise the authority of a sole shareholder.

Division of a Company

A company division may take place, for example, by splitting the original company into several new entities that assume its assets, rights, and obligations. In another scenario, part or all of the company’s assets may be transferred to one or more existing companies.

In the case of a company division, it is again necessary to draft a plan. We would be happy to prepare documentation for you that clearly sets out how the assets and liabilities will be allocated among the new or successor companies. Keep in mind that you must also publicly announce the planned division so that creditors have the opportunity to object to it. Only after these matters have been settled can the division of assets, rights, and obligations among the successor companies take place.

Summary

The dissolution of a company without liquidation is primarily used for business entities when, upon transformation, the company’s assets are transferred to a legal successor or an acquiring partner. This is precisely the main difference between dissolution with and without liquidation—in liquidation, the company’s assets and debts are settled through a liquidator, whereas in a dissolution-by-transformation, they are transferred in accordance with the law and the transformation plan. The main options include a merger, a demerger, and the transfer of assets to a shareholder. Each option has its own rules regarding the preparation of the transformation plan, creditor protection, settlement with shareholders, and registration in the Commercial Register; therefore, it is advisable to assess the legal, accounting, and tax implications in advance.