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Jitka Pešičková | February 7, 2023

Liquidation of business corporations – part III

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I would like to follow up after some time on the previous two articles concerning liquidation of business corporations. In the first article, we introduced the basic differences between the dissolution of a company without liquidation and with liquidation. We also learned that a company can be dissolved voluntarily or involuntarily and that a voluntary dissolution can be preceded by a “preparatory stage”.

In the second article, we looked at the obligations associated with a company entering liquidation, such as the preparation of annual/extra-ordinary financial statements as of the day preceding the date of entry into liquidation, the filing of tax returns, the publication of advertisements in the Commercial Bulletin and the preparation of an opening balance sheet and a statement of assets.

In the previous articles we have thus described the acts related to the entry of a company into liquidation. In this, the third article, I will take you through the process of liquidation. The process of liquidation can be challenging in various ways. This largely depends on whether the corporation went through a preparatory stage before entering liquidation or it left these matters to the liquidator.

Generally speaking, in the course of liquidation, the liquidator collects debts, monetizes the remaining assets, settles liabilities and terminates the company’s contractual obligations. The liquidator primarily relies on the opening balance sheet and the statement of assets, but there may be other liabilities of the company, e.g. due to the publication of an advertisement in the Commercial Bulletin.

After entering liquidation, the liquidator has relatively enough time to familiarise himself with the accounting balances and the possibilities of settling them. From the second publication of the advertisement in the Commercial Bulletin, the three-month period for filing claims in liquidation starts and the liquidation cannot be terminated within this period. 

It is impossible to predict and describe all the specific steps in the disposal process, but let us go through the most common ones together:

Accounting balances

By compiling an opening balance sheet and a statement of assets, the liquidator becomes familiar with the company’s accounting balances. In order to quantify the liquidation balance, the accounts should ideally be brought to a stage where no more company expenses (or income) are expected, all inventories and non-current assets have been sold, receivables have been settled and liabilities have been paid.

Let us now go through the basic principles of the settlement of accounting balances in liquidation by the balance sheet items.

If the company registers claims for the subscribed share capital, the shareholder’s liability may be settled by agreement with the liquidator or the liquidation balance may be settled in accordance with the Companies Act and the wording of the articles of association.

For intangible non-current assets that are difficult to transfer, there is usually a write-down of the remaining value and subsequent disposal of the asset.

Tangible non-current assets may be sold, physically disposed of or retained as a non-cash form of liquidation balance. No tenders are required for the sale, however, the liquidator is bound by due diligence.

When selling any assets to related parties, the sale price must be set at arm’s length, otherwise the company runs the risk of being additionally taxed by the tax authorities.

The item non-current financial assets is not frequently encountered during liquidation because companies have usually already sold their shares in other companies or have been dissolved in mergers/acquisitions.

More information is needed on stocks. Unsellable inventories can be disposed of (an accounting write-down occurs). For inventory that can be sold, the selling price will need to be evaluated with the efficiency of the sale. For sales to related parties, please note again the setting of the normal price. 

In the case of non-current receivables, it is possible to wait until the due date, arrange a closer due date, sell/assign the receivable or write off the receivable. The solution depends on the current situation, especially in terms of the significance of the claim and its maturity.

Collection of short-term receivables in liquidation is no different from standard debt collection. In the case of tax receivables, a refund of overpayments is requested from the locally competent tax office, or an assessment of tax receivables (and liabilities) is also requested on the basis of a request for the taxpayer’s personal account balance.

For cash, the liquidator should satisfy check as to the existence and correct amount of the cash recorded.

Open asset and liability accruals and provisions are hardly encountered during liquidation. In most cases, they are already accounted for in the financial statements as of the date preceding entering into liquidation in accordance with the relevant accounting rules.

During liquidation, liabilities are paid as they fall due; for non-current liabilities, it may be advantageous in terms of time to pay liabilities at an earlier date. In the area of liabilities, the company’s liabilities may increase in the course of liquidation due to the related settlement of claims filed by creditors based on notices published in the Commercial Bulletin.

Increased attention is paid to the amount of equity during the liquidation process. Negative equity can be an indication that a company is in bankruptcy. If the liquidator reaches this conclusion, he is obliged to file for insolvency proceedings. Conversely, a positive amount of equity will be the gross liquidation balance in the future (as of the valuation date).

The accounting obligations in the course of liquidation also include the obligation to prepare financial statements as of each balance sheet date and to prepare the related corporate income tax return. The deadlines for submitting tax returns are standard during liquidation (i.e. within 3 months or 6 months of the balance sheet date).

In addition to the settlement of accounting balances, the liquidator represents the company in the event of litigations, enters into new contracts leading to liquidation, informs the trade licensing office about the termination of the company’s activities, terminates employment relationships with employees as necessary.

Archiving of documents

It is also worth mentioning that the documents of the liquidating company should be archived during the liquidation. The liquidator may contact a businessman specialised in the management, storage, sorting and archiving of documents. This contractor (selected expert) will ensure consultation with the locally competent archive, preservation of the documents and ongoing discarding of the documents.

In addition to using an external service provider, documents may be stored in another location suitable for the storage of documents and the locally competent archive may be informed of the storage of the documents. However, here it is necessary to be familiar with the Archive and File Service Act and the deadlines for archiving documents set by the Accounting Act, the Value Added Tax Act, the Business Corporations Act and other legal regulations.

Disposal of ordinary certificates and shares

It is also advisable, especially for reasons of time at the end of the liquidation, to inform the holders of ordinary certificates in the case of limited liability companies and the holders of shares that the entitlement to payment of the share of the liquidation balance arises on the return of the ordinary certificates and shares or, in the case of book-entry shares, on the date of cancellation of the shares in the register of book-entry securities.

If more than 3 months have elapsed since the second publication in the Commercial Bulletin, and the liquidator has settled the accounting balances, except those that will enter into the liquidation balance (in particular cash and equity), and all disputes, if any, have been settled, the liquidation balance may be calculated.

We will inform you about this, and about the final stages of liquidation in the final article Liquidation of business corporations – are we finally finished?

Author: Jitka Pešičková