Dissolution and liquidation of a limited liability company – how to do it?

Is your company not prospering? Have you and your partners decided to close the company and send it into liquidation? Take us through step by step how to do it.

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The dissolution of a limited liability company (s.r.o.) can occur in several ways. The voluntary options are the decision of the shareholders or the general meeting, the achievement of the purpose for which the company was established or the expiry of the period for which it was established. Involuntarily, the company may be dissolved by a court decision. In the following we will focus exclusively on the first variant, i.e. the liquidation of a limited liability company based on the decision and will of the shareholders.

Some entrepreneurs have long since ceased the activity of their company, but the company as such exists and is, so to speak, “on ice”. This is of course possible, but its owners or partners should bear in mind that even this dormant company requires certain costs. It is still necessary to keep accounts, file tax returns and produce financial statements, even if this is more of a formality.

The dissolution of a limited company to some extent replicates or follows on from its formation. Just as registration in the commercial register is preceded by a memorandum of association or a deed of incorporation in the form of a notarial deed, the process of liquidation of a company has several stages.

Do you need a lawyer for your business?

Whether you are advising on a routine business law matter or have reached the point of needing to liquidate your company, regular consultation with an attorney will help guide your decisions and legal actions in the right direction.

The first step leading to the dissolution of an LLC is its dissolution. This is followed by the process of its liquidation, and once this is completed, the company may be dissolved and cease to exist. Although dissolution, liquidation and winding up are terms that may be used interchangeably in common parlance, when dealing in the corporate law environment it is essential to observe precise terminology, otherwise confusion can easily arise.

Dissolution of a company

The dissolution of a limited liability company should be decided by agreement of all its members. However, the articles of association may provide that the general meeting has the power to dissolve the company. In this case, the approval of at least a two-thirds majority of the votes of all the shareholders is required. In both cases, a notarial deed is required.

The decision to dissolve the company can still be changed subsequently, but only until the purpose of the liquidation is fulfilled. On the basis of the decision to dissolve the company, the company enters into liquidation.

Liquidation of the company

The dissolution of the company is followed by liquidation. The only exceptions would be situations where the entire assets of the company are transferred to another entity (e.g. merger) or where there are no assets.

The aim of the liquidation process is to settle the company’s relations, i.e. assets and debts to third parties, and to pay any balance to the shareholders. In this process it is necessary to protect creditors in particular, but the law of course also considers the protection of shareholders.

The protection of creditors is primarily served by a provision of the law which imposes the obligation to inform all known creditors. Unknown creditors are then invited by the liquidator to submit their claims by means of a notice published in the Commercial Gazette. The notices must be published repeatedly, at least twice, with a two-week interval between each notice. In the notice, the liquidator shall set a time limit for the company’s creditors to lodge their claims, which shall not be less than three months after the publication of the second notice.

Thus, liquidation does not apply to over-indebted companies whose debts are usually settled in insolvency proceedings. In practice, liquidation in the cases we have described usually takes place in a company with no employees and with discontinued operations. It is therefore more of an administrative and accounting process.

If employees are present, their claims must be satisfied in priority. Employees are, of course, also entitled to severance pay.

Tip: Need to check if your business partner is in insolvency proceedings? Are you closing an important deal and need to do a good background check on your business partner? Use the public registers. In our article, we advise you on what can be found in them and how to proceed if the counterparty is indeed in insolvency.

After the company enters into liquidation, only those steps can be taken which lead to the fulfilment of the above-mentioned purpose of liquidation. The prefix ‘in liquidation’ must also continue to be used in commercial and official communications.

Who is the liquidator and what are his/her competences?

The liquidation is carried out by a special body, the liquidator. Only a person with full legal capacity and good character who has not been convicted of a deliberate criminal offence committed in connection with the business or its object may become a liquidator. A legal person may also be appointed liquidator, but then its authorised representative must meet the requirements. However, the liquidator does not necessarily have to come from outside the company, but can also be a shareholder or managing director. Again, this is an important difference from an insolvency administrator and insolvency as such.

The appointment of a liquidator is decided by the company’s managing director, unless the articles of association confer this power on the general meeting. This function may be terminated either by the liquidator’s resignation of his own volition, by his death (or dissolution of the legal entity) or by the end of the liquidation.

How is liquidation carried out?

The liquidation process often takes a few months, but it can extend over several years. It depends primarily on the current state of the company’s assets and whether the company has debts.

As we mentioned above, an important moment in the liquidation process is the notification of the entry into liquidation to the creditors.

At the same time, the financial statements as at the date preceding the date of entry into liquidation are drawn up. This should include a detailed inventory of assets and liabilities.

The liquidator then draws up an opening balance sheet and an inventory of the company’s assets on the basis of these documents. This includes all assets and all debts and can be requested by any creditor.

The key task of the liquidator is to monetise the so-called liquidation assets of the company. This can be done by auction, outright sale or other means. The choice in this case is up to the liquidator, who acts with due care.

The claims which are subsequently satisfied from the proceeds have a statutory order. These are:

  1. liquidation costs,
  2. claims of employees,
  3. claims of creditors.

The debts should be settled as they fall due, but it is also possible to agree on their early repayment. The liquidator may also offer the creditors the unmonetized liquidation assets to be taken over for the payment of debts. This is done if the entire liquidation estate has not been monetised.

Termination of liquidation and dissolution of the company

After all legal and financial relations of the company have been settled, the liquidation may be terminated. The liquidator shall draw up a final report on the course of the liquidation.
It shall include, in particular, information on:

  • how the liquidation assets have been dealt with,
  • the proceeds obtained from the sale of the liquidation,
  • what part of the assets has not been monetised and how they have been disposed of,
  • how debts were settled,
  • whether any assets remained after the settlement of the debts – the liquidation balance and the proposal for its distribution.

The financial statements are also drawn up at the same date. The liquidated company must also file a proper tax return within 15 days of the date on which the proposal for the use of the liquidation balance is made.

The accounts, the liquidator’s final report and the proposal for the use of the liquidation balance shall be submitted to the body which elected the liquidator for approval. The liquidation shall end with the application of the liquidation surplus.

Within 30 days thereafter, the liquidator shall submit a proposal for cancellation. In addition to the documents referred to above, the proposal shall be accompanied by the accounting documents which the company is required to publish in the collection of documents and documents certifying the publication of the notice of liquidation in the Commercial Gazette. The tax office must give its consent to the cancellation. The deletion of the company from the Commercial Register shall terminate the company.

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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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