Dissolution of a cooperative: when to proceed?

Have you set up a social or housing cooperative that has already fulfilled its purpose? Do you have a production cooperative that is economically impossible to keep alive? Sometimes a situation arises when objective circumstances or the will of the members of the cooperative dictate its dissolution. How to proceed and what to leave out? And when can a cooperative be dissolved against the will of its members? This is the focus of our text.

Bytové družstvo. Ukončení a likvidace družstva
8 minutes of reading

Chapters of the article

General options for dissolution of a cooperative

The dissolution of a cooperative can occur through several completely different procedures:

  • The members of the cooperative (general meeting) can approve a resolution to dissolve if they decide not to continue.
  • In addition, a court may decide to dissolve the cooperative if it finds that the cooperative is in breach of the law, for example if the number of members falls below a certain number.
  • A cooperative may also be dissolved on the expiry of the period for which it was set up or on the achievement of the purpose for which it was set up.

We will deal primarily with the first variant, i.e. the situation where the members themselves voluntarily consider and choose to dissolve the cooperative. However, we will also briefly mention the judicial variant.

Resolution of the members’ meeting on the dissolution of the cooperative

When it comes to the dissolution of a cooperative by resolution, the members’ meeting can decide whether to dissolve the cooperative with or without liquidation. It enters into liquidation on the date it is dissolved by resolution. If the general meeting decides to dissolve, notarial certification must be obtained for the decision. The final dissolution of the cooperative requires its deletion from the commercial register.

The liquidation process is incomparably more demanding than the establishment of a cooperative in terms of complexity and the necessary knowledge of the law. Count on the fact that the dissolution of a cooperative is not a matter of a week, it usually takes many months.

Appointment of a liquidator

A dissolved cooperative must enter into liquidation unless the law provides otherwise. Liquidation is a process, registered in the commercial register, in which the cooperative’s debts and claims are settled. The appointment of liquidators is decided at a members’ meeting and is regulated by the cooperative’s statutes. It is worthwhile to combine the decision to dissolve the cooperative with the liquidation with the election of the liquidator and the determination of the terms of his remuneration, and to include all these items on the agenda of one membership meeting.

The liquidator should be a person with knowledge of both law and accounting, so that everything is done in accordance with the law and cannot be challenged retrospectively. At the same time, the law lays down certain requirements for the liquidator, in particular that he or she has not been the subject of insolvency proceedings in recent years or otherwise prevented from holding office. As soon as he is appointed, the liquidator acquires the powers of the statutory body of the cooperative.

The liquidator shall subsequently acquaint himself with the state of the accounts, the assets and the members of the cooperative. As a rule, he shall be an external person who is not a member of the holding company to whom remuneration is due. This should also be budgeted for in advance.

The liquidators shall draw up a proposal for the distribution of the liquidation balance and distribute it among the members in accordance with the methods laid down in the statutes. Once the liquidation is successfully completed, the cooperative can be deleted from the commercial register.

A cooperative which has entered into liquidation without a liquidator having been called in shall be appointed a liquidator by the court ex officio. A liquidator so appointed may then be removed only by the court.

In our legal practice, we have encountered the erroneous procedure of clients who chose to dissolve the cooperative by a decision of the membership meeting and at the same time considered the SVJ as the successor of the housing cooperative and transferred all the balance and assets of the original cooperative to it. However, this is legally completely incorrect. In such a case, the cooperative ceases to exist without a legal successor and must be liquidated and the assets distributed among the existing members of the cooperative. The subsequently formed SVJ is legally completely separate and independent, although in practice it may happen that the same people meet in it and use the same property. Such a mistake may give rise to a fundamental questioning of the actions of the JVU by some of its members. A transfer of assets would be possible in certain circumstances, as there may be, among other things, a transformation of the cooperative, i.e. a merger, division or change of legal form or other form of transfer of assets. However, these would require a completely different approach. If you want to avoid unlawful procedures, it is entirely appropriate to consult a lawyer about the individual steps.

Do you run a cooperative?

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The resolution adopted to dissolve the cooperative with liquidation may be amended again later by resolution of the members’ meeting if the liquidation has not yet been completed.

The final objective of the liquidation is to settle the assets of the dissolved cooperative and to settle debts to creditors.

The dissolution of the cooperative also requires its deletion from the commercial register. On the date of deletion the cooperative ceases to exist. Together with the application for the deletion of the cooperative from the commercial register, the consent of the tax administrator to the deletion must be submitted to the registry court. The registry court should also receive a report on the progress of the liquidation.

Tip: Co-operatives work on the principle of membership and democratic control, allowing members to share profits and decide the direction of the business. But how exactly do cooperatives work and what are their benefits? That’s what we look at in our separate article. We’ll reveal why a co-operative could be the right choice for your business or community project.

Liquidation of a cooperative that has failed to fulfil its purpose

A fundamentalerror related to the dissolution of a cooperative is the ordering of an early liquidation – this situation may arise if the cooperative is to be dissolved after its purpose has been fulfilled, but this has not yet occurred. For example, in the case of a housing association, not all the flats have been transferred to the ownership of the individual members. In such a situation, liquidation cannot be started. On the contrary, however, once the flats have been sold off, it is recommended not to delay liquidation so as not to unnecessarily duplicate the costs of the administration of the cooperative and the HOA, as it is still necessary to comply with the letter of the law, keep accounts, hold membership meetings and fulfil other obligations set out in the legislation.

Tip: A cooperative is a specific type of corporation that is worth forming for many reasons. Typically, if you need to manage an apartment building, but also perhaps if you want to provide social services or join together for agricultural activities. How to proceed if you have such an intention?

Dissolution of a cooperative by court decision

A cooperative may be dissolved by order of the court only if the law so provides. In practice, such a procedure occurs quite rarely.

Theoretically, the court may decide to do so, for example, if the cooperative has fewer members than the law allows or if it has a low total of member contributions that cannot even cover the cooperative’s basic capital, i.e. CZK 50,000. A cooperative is also dissolved if two years have elapsed since the end of the term of office of the individual bodies and no new persons have been appointed to manage them during that time. Alternatively, if the cooperative has not had a regular general meeting, does not carry out any activity, or violates the obligations in the law or in the statutes, it may be dissolved by order of the court.

However, the court’s intention is primarily to bring the relationship into compliance with the law and therefore provides a period of time to remedy such a situation. Thus, there is no need to fear a situation where one of the members of the cooperative dies and the cooperative is dissolved by the court immediately thereafter.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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