Methods of Liquidation. Overview

Dmitry Igumnov

Hello. My name is Dmitry Igumnov. I am in charge of the Companies Liquidation practice. Being a professional manager, I have to address all issues related to liquidation of companies and accept personal responsibility for the result. Obviously I have good understanding of legal aspects of liquidation, but from my practical experience I know that the main difficulties in such projects are not theoretical but organizational ones. My views of the problem may differ from the opinions of legal counsels; I take into consideration availability and reliability of instruments on this specific market of legal services, current peculiarities of the legal practice and their possible consequences for the owners and managers of a liquidated company.

Having faced a problem of liquidation of an enterprise and contacted us, my clients can afford SLEEPING PEACEFULLY without any worries. And I wish to you the same!

My plan is as follows: First I shall list the basic methods of liquidation used at present. This will allow you to see the whole range of possibilities without getting lost in excessive details. Then I shall review the main advantages and disadvantages of each method. In conclusion, I will make practical recommendations and describe combinations of the methods based on the experience and common sense.

But before we start I would like to attract your attention to one threat that is often not understood and disregarded when selecting a method of liquidation. This, in terms of legislation, is a subsidiary liability of a decision maker, i.e. a personal liability of a physical person — a founder (member), manager, etc. — for the total indebtedness of the company to the budget or other creditors to the extent of their assets. It is a common naпve belief that the liability in any case will be limited to the amount of the authorized capital. That’s not the case at all. Further on I shall give real examples of the recent legal practice where the tax service and other creditors were holding general managers and owners of small companies subsidiarily liable for the total creditor indebtedness amounting to millions of Rubles in full compliance with the legislation. Apparently, the crisis has activated these once “dormant” articles of the law and made them “popular”. Having spent some time reading legal forums one will see that at present to put pressure onto debtors many lawyers build their strategy on this weak spot of founders and managers, both present or former, nominal or real ones. Accordingly, s subsidiary liability can become the main threat and the main criterion when selecting a method of liquidation of a company. But not necessarily so, and this is why we will consider all methods and will not disregard any of them.

Basic Methods of Liquidation

All methods of winding-up of companies at the desire of their owners can be divided into official and “alternative” ones.

Official

In case of official liquidation a legal entity is taken off the Uniform State Register of Legal Entities (USRLE) — it receives a “death certificate” which is considered by the owners and management of a company to grant them immunity from any possible claims of the tax service, law enforcement agencies and creditors. Such methods include:

Mandatory removal of inactive legal entities from the USRLE by the decision of tax authorities
The simplest solution is to cut the company adrift. If within 12 months an organization fails to present its financial reports and doesn’t make any bank operations tax authorities will have legal grounds to make a decision on exclusion of the abandoned company from the Register. According to the procedure, when tax authorities consider subsequent exclusion of an enterprise from the Register, they must publish this information in the State Registration Bulletin (http://search.vestnik-gosreg.ru) and wait for 3 months for any statements of representatives of the enterprise or its creditors. In absence of such statements on revival of the debtor, liquidation will be finalized extrajudicially due to low probability of settlement of indebtedness. Existence of any indebtedness to the budget does not preclude the use of the procedure of exclusion of an inactive legal entity from the USRLE.
Voluntary liquidation of an enterprise by the decision of its founders
This procedure is thoroughly laid out in the Civil Code and in short can be described as follows: the founders make a resolution to wind-up, inform the tax authorities of the liquidation, appoint a liquidator or a liquidation commission, publish a notice of liquidation, field tax inspection of the last 3 years records is appointed, and after the inspection either debt collection takes place or the indebtedness is recognized uncollectable. After that an interim liquidation balance sheet is prepared and submitted to registering tax authorities, claims of first and subsequent priorities creditors are satisfied, measures are undertaken in order to recover debtor indebtedness. After the claims of all creditors have been satisfied the remaining assets, if any, are distributed among the founders and the company stops existing.
Involuntary bankruptcy of a debtor
This procedure consists of two stages and commences in the same manner as the aforesaid procedure of voluntary liquidation. When developing an interim liquidation balance based on available records and the results of inventory survey a liquidator identifies credit indebtedness exceeding 100.000 Rubles that cannot be repaid by the debtor out of its own funds. This is when the first stage finishes and the second one commences. The Chairman of the liquidation commission applies a statement of bankruptcy of a debtor to be liquidated to the arbitrary court. The bankruptcy of a liquidated debtor is a simplified bankruptcy procedure, i.e. prescribed by the law measures such as supervision, financial rehabilitation and external management are not applied in this situation. Only bankruptcy management can be performed. The court appoints a receiver from a self-regulating organization of professional court-appointed receivers listed in the debtor’s statement. Upon completion of the bankruptcy proceedings the enterprise is taken off the USRLE and its indebtedness is deemed cancelled.

Alternative

When “alternative” methods are used, the company is not liquidated, but the liability for its current activities is transferred to other physical or legal persons. Former owners and managers of the company terminate formal relations with the company. Such methods include:

Change of the founders and management of the enterprise
This is a quick procedure: change of the founders/shareholders of the company is performed by way of selling the stock/shares to a new owner while the company keeps existing. The sales and purchase transaction must be notarized to confirm the legal capacity of the new owner. From the moment of the state registration of the changes to the constituent documents the former owners cease to bear any liability for the current activities of the company.
Reorganization of the enterprise by way of consolidation or merger with another company
Consolidation means that a legal entity is consolidated with another existing company — a successor. In case of merger of two or more legal entities a new legal entity, successor, is established. In both cases the legal consequences are the same. The successor takes over all rights and liabilities of the former enterprise, including the outstanding ones, as well as those not recognized or disputed by the parties and those that are not apparent at the time of reorganization. Accordingly, the responsibility to pay taxes, fines and penalties of the reorganized legal entity shall be imposed onto the successor no matter whether the latter was aware of such prior to the reorganization or not. The former enterprise will be deemed non-existent from the moment a respective entry is made into the USRLE.