Enterprise Liquidation Process

Peculiarities of Enterprise Liquidation Process

Sometimes legal entities that run business are forced to stop their activity for certain reasons. Today jurisprudence formulates only a generalized definition of enterprise liquidation. Namely, this is a process which results in a full stop of a legal entity operation. There is a set of normative acts that are supposed to regulate enterprise liquidation procedure (the Civil Code of Ukraine, the Economic Code of Ukraine, the Law of Ukraine On Business Associations, etc).

Enterprise liquidation process is quite complicated and time-consuming. Almost all entities related to a corresponding type of activity are involved in this procedure. In order to complete all enterprise liquidation steps in a relatively fast and accurate way, one must perfectly know all the necessary information and adhere to the algorithm of actions specified by the Law of Ukraine.

Not everyone can properly organize an enterprise liquidation, as during this process different problems and discrepancies may appear and delay the procedure for some additional time. Therefore, the best choice is to use professional help. Contact A. T. Consulting Company to get a qualified legal advice about creation, operation, and liquidation of an enterprise.

Who Takes Decisions on Enterprise Liquidation

Liquidation is one of the ways to stop the activity of a legal entity. In such case, there is no possibility of legal succession and the enterprise fully loses its obligations and rights. Enterprise liquidation process consists of different stages, first of which is the decision to stop the activity. Future steps will depend on the cause of the liquidation. A legal entity can be liquidated for the following reasons:

  • By the personal decision of an enterprise owner. It is necessary to complete the protocol of a co-founders’ general meeting resolution. However, if the enterprise is a founder (member) of a business association, it cannot be liquidated as a legal entity. To stop its operation through liquidation such enterprise has to exit all business associations.
  • By bodies of executive power (for example, court). This is an enforced enterprise liquidation. In the course of this process, the state registration of the legal entity is acknowledged as invalid. This type of activity liquidation can, for example, happen due to the mistakes made during the entity registration procedure.
  • When the Law of Ukraine stipulates the decision to liquidate the enterprise. For example, an LLC must submit a liquidation decision, if the value of net worth is less than the indicated minimum (less than the minimal amount of the authorized capital specified by the law).

The liquidation rules related to the specific types of enterprises are clearly indicated in the legislation, which manages the activity of these legal entities. For example:

  1. Declaring an enterprise bankrupt (bankruptcy). The liquidation rules are described in the Law of Ukraine On Restoring Debtor Solvency or Declaring a Debtor Bankrupt.
  2. Banking institutions liquidation is specified by the Law of Ukraine on Banks and Banking Activity.”

If enterprise members, court or other governmental bodies have decided to liquidate the enterprise, they should immediately notify (in written form) the body responsible for state registration about this decision. Later they will have to submit a set of documents to this body. And after that, it will record the decision on the legal entity activity termination in the Unified State Register of Legal Entities and Individual Entrepreneurs. Anyone can access the data of this registry. Therefore, creditors will be able to learn that the legal entity is planning to terminate the activity of the enterprise.

Here are some nuances related to the decision to terminate the activity of an enterprise. Different forms of enterprise organization have unlike demands:

  1. Private enterprise. The decision is taken by the owner and formalized in a form of disposition, order, or decision within the enterprise.
  2. General and limited partnership company. The decision is taken by the general consent of all association’s members who participate in the meeting. It is attested with a participants meeting protocol.
  3. Limited liability company and additional liability company. The decision about the enterprise liquidation is taken on a company members meeting and attested with a meeting protocol. It can be taken if the majority of the meeting participants vote for this while the members who have more than 60% of joint votes are absent.
  4. Joint stock company. In this case, the decision is attested with the protocol completed on a general stockholders meeting. It is taken by the majority of the participants’ votes (at least three fourths) when the people with more than 60% of votes are present.

The decision regarding liquidation commission appointment and liquidation balance sheet approval is made in the same way. As to affiliates (separate units that are not legal entities), they are also liquidated by the decision of the corresponding enterprise management body, which is authorized to take such actions by the statute. However, sometimes affiliates can face compulsory liquidation (if a legal entity is declared as bankrupt, etc).

The Second Stage of Enterprise Liquidation: Special Commission Appointment

After the authorized bodies have decided to liquidate the enterprise, in order to deprive it of a legal entity status it is necessary to move to the following step of the liquidation process. Namely, appoint a commission that will carry out the liquidation. It is created by a body or a person who has taken the decision on the enterprise liquidation. In some cases, it may be even a management body of the enterprise that is currently terminating its activity. This commission can consist of one or more people. If the enterprise liquidates itself, the commission is created by a company owner or an authorized person. Therefore, they will terminate the enterprise activity within the scope of their job responsibilities. This procedure can also be carried out by one individual. Usually, this is true for small enterprises. Note that if the liquidation is voluntary, the composition of the liquidation commission is not regulated. In such cases the group usually consists of:

  1. Enterprise manager (head of the liquidation commission).
  2. Senior accountant.
  3. Other employees.
  4. Representatives of audit companies, etc (if required).

If there is a state share in the authorized fund of the enterprise, the commission should also include a representative of the state-owned property owner from the corresponding body. It is better if a number of commission members is odd as this simplifies the decision-making process and helps to count the votes.

The day when the special liquidation commission is appointed, it acquires powers to manage all activities of the legal entity. However, the members reserve some authority, such as liquidation balance sheet approval. During the liquidation process, the enterprise maintains the status of a legal entity. However, the very liquidation commission does not obtain such status. It speaks in the court and takes other actions on behalf of the legal entity, acquiring obligations and rights for it. The details of the enterprise are used to formalize its operations in all documents.

If the commission has decided to close the enterprise through liquidation, its owner should define the term during which the documentation (accounting, etc.), stamps, seals, and material assets of the enterprise will be transferred to the commission. If the liquidation is carried out by a body of the legal entity, there is no need to transfer the aforementioned assets and documents. The body that is supposed to decide on the enterprise liquidation sets the time and order of this procedure and defines the deadline (no less than two months) during which the corresponding claims of creditors should be satisfied.

Work of an Enterprise Liquidation Commission: a Special Announcement is Placed in Press

The liquidation commission should publish a special announcement about the termination of the legal entity activity in media. The announcement indicates the terms and order of creditors’ claims. Such announcements must be placed in a special printed mass medium (“Herald of state registration”). In addition, they must include the following information about the legal entity:

  1. Name.
  2. Address.
  3. Taxpayer licence number.
  4. The reason for the enterprise liquidation (reconstruction, merger, liquidation, takeover, or division).
  5. Information about the liquidation commission and the date of its appointment.
  6. Data about the date and place where the enterprise liquidation decision entry was made.
  7. The term during which the creditors can assert their claims to the enterprise under liquidation and the order of this procedure.

Only business associations have a set term (three days after the corresponding decision) after which the information about the enterprise liquidation is placed in media.

Enterprise Liquidation: an Inventory Check

During the enterprise liquidation, it is obligatory to organize an inventory check. This process is described in the last subparagraph of the third clause of the Instruction on the inventory of fixed assets, intangible assets, inventories, cash and documents and calculations (Order of August 11, 1994, № 69). However, the exact date of the inventory check cannot be set based on the information provided in these documents. It is logical that the inventory check should be conducted the day when the decision about the enterprise liquidation was taken. It must be organized right before a responsible body starts to complete an interim liquidation balance sheet. It is a certain sequence of actions that are supposed to document the availability, assessment, and condition of the enterprise’s obligations and property. The inventory check is carried out according to the Instruction on the inventory and covers all the obligations and assets of the enterprise (intangible assets, fixed assets, cash, calculations, documents, and inventories). The results of the inventory check are recorded in tax and regular accounting documents under the normal procedure. It is very important to ensure that the debts with passed limitation period are written off and the records include the information about shortages and surpluses.

Enterprise Liquidation: How to Evaluate the Property of a Legal Entity?

When the period during which creditors can submit their claims ends the liquidation commission draws up an interim liquidation balance sheet. It includes the information about the enterprise property assets, the list of creditor’s demands, and the results of their review.

It is important to take into account that during the enterprise property evaluation the accounting continuity principle stops working. Therefore, a special procedure is used to evaluate the obligations and assets of the enterprise under liquidation. If a municipal enterprise or a business association with a state share of the property is liquidated, the property should be evaluated by special appraisers (estimating entities). If a legal entity of other type or business pattern and ownership is under liquidation (sole proprietor, etc.), a special appraiser can evaluate the property, yet it is not obligatory.

Usually, the property of the enterprise is used to satisfy creditors’ property claims, yet sometimes it is not enough to cover the demands. Hence the priority of payments to creditors is set (art. 112 of the Civil Code of Ukraine):

  • First of all, the enterprise should satisfy the demands related to the compensation for damage caused by an injury, an occupational disease,  other health damage or even a death, as well as the creditors’ claims secured by a mortgage etc.
  • Then it is necessary to satisfy the employees’ demands related to labor relations and the authors’ claims regarding the payment for the use of their creative or intellectual activity.
  • After that, the demands related to charges and taxes.

The demands in separate queues are satisfied proportionally to the amount of drawings stated by every creditor. If a creditor asserts one’s claims after the time period for claim submission has passed, one receives a part of the enterprise property, which is left after the rest of demands timely submitted by other creditors are fulfilled. The demands are regarded as settled if the creditor did not address the court with a lawsuit during the defined time, the enterprise liquidation commission did not approve them, or the court refused to meet them.

The Order of Employment Contract Termination in case of Enterprise Liquidation

There is a procedure of employment agreement termination (a fixed-term contract that remains in effect till its validity and a permanent contract with the indefinite term) for wage laborers. It is carried out after the decision about the enterprise liquidation is taken. In such situation, some temporarily disabled employees may be laid off. The day the employees are dismissed they must receive properly filled employment record books (in the “Cause of dismissal” column should be indicated “Dismissed as the result of the enterprise liquidation…”) and copies of the orders of dismissal. In this case, the consent of a trade-union is not required to terminate the employment contract. However, the employees must be notified of the dismissal two months before it takes place. After the employees have been familiarized with the order, they should acknowledge this with their signatures. It will serve as an official confirmation.

There are some categories of employees who mandatorily need a job placement after the enterprise is liquidated. Including women with children under three years old, single mothers (if they have a disabled child or a child who has not reached 14 years of age), and pregnant women. If the representatives of this category are employed, they preserve the average salary during the employment process. In a way, it serves as a motivation for the employer who is liquidating the enterprise. All employees receive a severance pay if they are dismissed as the result of the liquidation. This sum should not be less than the average monthly earnings.

The Last Stage of Enterprise Liquidation Process

On the last stage of liquidation, the record about the state registration of legal entity termination is made in the Unified State Register of Legal Entities and Individual Entrepreneurs. After the formalized liquidation procedure is completed, the head of the commission or an authorized person must send a set of documents defined by the legislation to a state registrar. The signatures of members and the head of the liquidation commission must be attested by a notary. The liquidation balance sheet is confirmed by the body that has taken the decision about the liquidation or the legal entity founders. After all the aforementioned steps are taken, the enterprise will not be regarded as a legal entity.