HOW TO LIQUIDATE A CZECH LIMITED LIABILITY COMPANY (s.r.o.)
Given the current unpredictable situation, a number of actively operating Czech limited liability companies (s.r.o.) are facing a difficult decision whether to terminate or continue with their business. Liquidation of the company is one of the possible ways how to terminate the business. Liquidation is a process leading to the termination of the business of a business corporation, i.e. its winding-up and dissolution in cases where such a company is not in insolvency. If the company is insolvent or over-indebted, its winding-up and dissolution cannot be solved by liquidation, but it is necessary to initiate insolvency proceedings based on the insolvency petition.
The aim of the company liquidation is to arrange property relations and at the same time to settle all property relations, which will subsequently lead to the winding-up of this company and its deletion from the Commercial Register.
Once a limited liability company enters into liquidation, its activities cease and all actions should be directed solely to the arrangement of its assets, the settlement of debts to its creditors, the disposal of the net liquidation balance and, consequently, its dissolution.
Therefore, below we provide a basic overview of the most important actions with a brief description of them, which must be carried out within the liquidation of the company, however, always considering the circumstances of each specific case.
- WINDING-UP OF COMPANY
The winding-up of the company begins with the decision of the competent body and the company to enter into liquidation, provided that the entire company assets are not being passed to its legal successor. The decision on winding-up must always be made in the form of a notarial deed. In the case of a limited liability company, the general meeting of the company always decides on the dissolution of the company, and 2/3 of the votes of all shareholders are required to take the decision.
On the day of winding-up, the company enters into liquidation. As a day of winding-up, the company and entering the liquidation is usually chosen for accounting reasons on the first day of the calendar month.
- OBLIGATION TO SUBMIT TAX RETURN AFTER ENTRY TO LIQUIDATION
The Company’s dissolution and entry into liquidation are followed by the obligation of the company to file a proper tax claim within 30 days from the date of its entry into liquidation, for the part of the tax period that elapsed before the date of its entry into liquidation.
- APPOINTMENT OF THE LIQUIDATOR AND ITS REGISTRATION IN THE COMMERCIAL REGISTER
Together with the winding-up of the company and its entry into liquidation, the law imposes an obligation on the competent body to appoint a liquidator, which in the case of limited liability company is elected by the general meeting (if so stipulated by the memorandum of association), otherwise the statutory body. At the moment of its appointment, the elected liquidator acquires the competence of the statutory body, whereas it may pursue only a purpose that corresponds to the nature and objective of the liquidation. The remuneration of the liquidator is determined by the person who appointed the liquidator.
The liquidator subsequently proposes to record this fact in the Commercial Register without undue delay after the company enters into liquidation. For the entire duration of the liquidation, the company uses its business name with the addition “in liquidation”.
- NOTICE OF ENTRY INTO THE LIQUIDATION TO TRADE LICENSING OFFICE
Information about the entry of a legal entity into liquidation is also recorded in the Trade Register. Therefore, the company is obliged to notify the Trade Licensing Office without undue delay after the entry into liquidation.
- NOTIFICATION OF ENTRY INTO LIQUIDATION AND ITS PUBLICATION IN THE COMMERCIAL BULLETIN
After the company enters into liquidation, the liquidator is further obliged to notify all known creditors about this fact. The liquidator is also obliged to announce the entry into liquidation without undue delay by publication in the Commercial Bulletin, at least twice in a row (at least two weeks apart), together with a notification for creditors to file their claims within a period not less than three months from the second publication.
Due to the wording of the law and the obligation of the liquidator to draw up the initial balance sheet and the inventory of assets of the company (on the basis of which some of the company´s creditors will be already known to the liquidator), the liquidator is obliged to consider the receivables of the known creditors as already registered. On the other hand, in the case of other, unknown creditors, it is highly appropriate to apply the aforementioned obligation of the liquidator to report the entry into liquidation in the Commercial Bulletin.
- PREPARATION OF INITIAL BALANCE SHEET AND INVENTORY LIST
Another obligation of the liquidator is to prepare the initial balance sheet, which is part of the financial statements, and the inventory of the legal entity’s assets as of the date of entry into liquidation. If the statutory body does not prepare these without undue delay, this obligation passes to the liquidator.
- PREPARATION OF FINANCIAL STATEMENTS
As of the date prior to the Company’s entry into liquidation, the relevant statutory body is obliged to ensure that the complete financial statements are prepared.
- OBLIGATION TO SUBMIT INSOLVENCY PETITION
If the liquidator finds out during the process of liquidation that the company is insolvent, it is obliged to file an insolvency petition without undue delay, otherwise, the liquidator is exposed to the risk of its liability under the Insolvency Act.
- SETTLEMENT OF PROPERTY RELATIONS, DEBTS AND RECEIVABLES
In the course of liquidation, the liquidator has the right to monetize the liquidized assets and at the same time to settle all property relations that relate to the liquidated company. The liquidator is also obliged to keep a record of the claims of creditors, while at the same time it is also entitled to satisfy these claims. It is important to bear in mind that the claims of employees are by law preferential claims. On the other hand, the liquidator is also entitled to claim and enforce the company’s receivables.
A special chapter is formed by the issue of company employees. According to the Labor Code, the employer may terminate the employment relationship if the employer or its part is terminated. However, employees are entitled to severance pay in the amount stipulated by law.
- PREPARATION OF FINAL LIQUIDATION REPORT, FINANCIAL STATEMENTS, AND PROPOSAL FOR USE OF LIQUIDATION BALANCE
Once the liquidator has completed everything that precedes the disposal of the liquidation balance, it is obliged by law to draw up a final report on the liquidation process, stating how the liquidation was handled or, if appropriate, making a proposal to use the liquidation balance. On the same day, it also draws up the financial statements to which it attaches its signature. All documents shall then be submitted to the person who appointed the liquidator in the beginning.
However, until the rights of all creditors who have lodged their claims in time are satisfied, the share of the remaining liquidation balance cannot be paid.
- OBLIGATION TO APPLY TAX RETURN AFTER PROPOSAL FOR USE OF LIQUIDATION BALANCE
The preparation of the proposal for the use of the liquidation balance is followed by an additional obligation, namely the obligation to file a proper tax return within 15 days from the date of processing the proposal for the use of the liquidation balance, for the part of the taxation period that expired before the date of processing this proposal.
- ARCHIVING COMPANY DOCUMENTS IN STATE ARCHIVE
- APPLICATION FOR DELETION FROM COMMERCIAL REGISTER
Liquidation ends either by the use of the liquidation balance, the takeover of the liquidized assets by creditors or its refusal. The liquidator is obliged by law to file an application for the deletion of the company from the Commercial Register within 30 days from the end of liquidation. However, it is necessary for the application for deletion to be submitted simultaneously alongside with the consent of the tax authority with the deletion of the company.
For more information on this subject, please feel free to contact:
Vojtěch Makovec, partner
rutland & partners, law firm
tel: +420 226 226 026
email: vojtech.makovec@rutlands.cz
