Compulsory Liquidation of a Company: Consequences for Creditors, Employees, and Assets

The institute of compulsory liquidation of companies was introduced into our legal system in 2011, but its implementation was delayed due to the lack of legal regulations concerning the protection of creditors’ rights. It was not until 2019 that the Agency for Business Registers started to implement this procedure ex officio, enabling quicker resolution of cases where a company no longer meets the conditions for survival within the legal system, but fails to take any remedial action.

Since the compulsory liquidation process is often entirely led ex officio by the registrar of the Agency for Business Registers, without involving the company’s legal representative, without the participation of the shareholders, without the preparation of the initial and final liquidation report, and without notifying known creditors, this article will examine the consequences of the termination of a company’s legal status during compulsory liquidation on the rights of employees, the possibility of creditors collecting claims against the company, and the treatment of the company’s assets at the time of its legal dissolution.

The Status of a Company in Compulsory Liquidation

Compulsory liquidation begins when the registrar of the Agency for Business Registers (APR) determines that there are legal grounds for initiating the process. These reasons may be rectifiable or non-rectifiable. If the company is unable to rectify the identified reasons, the registrar issues a decision to initiate the compulsory liquidation procedure. From that moment, the company’s organs continue to function, but the company cannot undertake new business ventures, it can only complete ongoing business, including settling outstanding obligations, paying current obligations, and fulfilling responsibilities toward employees.

During the procedure, the payment of dividends or profit shares is prohibited, and the company cannot register changes in business data in the commercial registers or in the Central Register (CROSO).

Conclusion of the Procedure and Consequences of Deregistration of the Company

When the company is deleted from the register, its assets become the property of its members in proportion to their share in the company’s capital. According to the law, members of the company are liable for the company’s obligations up to the value of the assets they have received from the liquidation remainder, while controlling members of a limited liability company and shareholders of a joint-stock company are jointly and unlimitedly liable for the company’s obligations.

Creditors of the Company in Compulsory Liquidation

From the moment the compulsory liquidation procedure is initiated, all judicial and administrative procedures related to the company undergoing liquidation are suspended. If a creditor of the company, due to the suspension of the procedure, has been unable to collect their claim, case law has established that they can file a lawsuit against the controlling member of the company. The controlling member of the company, who independently or with related persons owns more than 50% of the shares or stakes in the company, is liable for the company’s obligations even after the company is deleted from the register. The controlling member’s liability ceases three years after the decision to delete the company from the register is made. According to Article 201, paragraph 4 of the Civil Procedure Law, the controlling member is obligated to accept the lawsuit as it stands at the moment they enter the case, regardless of the fact that the procedure was conducted without their participation until the moment of suspension.

Consequences for Employees

Regarding employment relationships, the Labor Law does not specify the exact moment when the employment relationship ends for employees of a company undergoing compulsory liquidation. However, case law indicates that the employment relationship ends as soon as the company ceases to conduct its registered activity, which usually occurs when the liquidation procedure is officially initiated.

Employees are entitled to unemployment benefits if they meet the conditions prescribed by the Employment and Unemployment Insurance Law, but the employer is not obligated to pay severance pay if the employment relationship ended due to the initiation of the compulsory liquidation procedure.

Treatment of Company Assets

One of the key consequences of compulsory liquidation is the question of ownership of the company’s assets after its deletion. According to the law, the assets of a deleted company become the property of its members in proportion to their shares in the company. The registration process in the land registry is carried out by law, without the need for special documents. Company members may regulate the distribution of company assets through an agreement, and in case of a dispute, the court may make a decision on the division of the remaining assets.

It is important to note that assets whose value exceeds the invested capital may be considered dividends, which carries certain tax obligations.

Conclusion

The compulsory liquidation procedure has significant implications for all parties involved in the company’s operations. Employees, creditors, and members of the company face different legal consequences, which can be complex, as the law does not always fully regulate every aspect of this procedure. Therefore, it is crucial for all parties to be aware of their rights and obligations, and legal advice can help protect the interests of everyone involved in the process.

If you have any questions regarding the compulsory liquidation procedure, feel free to contact us. Our law firm provides expert assistance in resolving these complex legal matters.

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