Liquidation of a joint-stock company

Liquidation of a joint-stock company
Michał Piwoński

Michał Piwoński

Senior associate / Attorney-at-law

A joint-stock company, being a holder of rights and obligations, has a legal personality. It means that it can act independently in economic transactions. Liquidation is the last stage of a company’s functioning in business dealings. It occurs as a result of one of the reasons for the dissolution of the company, indicated in Art. 459 of the Code of Commercial Companies. These include: reasons indicated in the company’s agreement, a resolution of the general meeting to dissolve the company, a resolution of the general meeting to transfer the registered office of the company abroad, the declaration of bankruptcy of the company, and the reasons indicated in separate acts. The purpose of the company’s liquidation is to finish its interests, pay debts, collect receivables, and withdraw the remaining amount to the shareholders.

What happens during liquidation of a joint-stock company?

During the liquidation of a joint-stock company, it preserves its legal personality. Only once the process is over the company loses it. So, a company loses its legal personality only after removing it from the register. The liquidation procedure is conducted under a business name with the designation ‘in liquidation’. The process changes the company’s objectives, but it preserves the entrepreneur’s status. But, it is limited by the liquidation purpose. Initiating the liquidation procedure results also in other effects described in special regulations. For example, the expiry of the permit granted to the brokerage house or of a permit to operate as a brokerage house.

Liquidation is a formalized and multi-stage process. It requires the fulfilment of strictly defined requirements. Below we discuss various reasons for the liquidation of a joint-stock company.

Company’s agreement as a reason to dissolve a joint-stock

Shareholders may specify in the agreement certain situations that allow for the dissolution of a company without any further actions. They can do it both at the stage of establishing the company and during its operation. Among the most frequently indicated reasons there are:

  • expiration of the period for which the company was established;
  • achieving a specific economic goal
  • obtaining financing for a particular project
  • failure to obtain the intellectual property rights required for the company’s intended activities,
  • lack of persons with specific qualifications to participate in a joint-stock company.

The occurrence of a cause specified in the agreement results in automatic initiation of the liquidation procedure. There is no need to adopt a separate resolution of the general meeting. The resolution will be necessary if the agreement requires it additionally. It will also be necessary when the indicated cause is so vaguely defined that the time at which the company’s liquidation opens is hard to determine with certainty.

The shareholders’ resolutions on the dissolution of a joint-stock company

Such resolution can be adopted on every stage of the company’s operations. It is adopted by the majority of votes which equals ¾. It must be also notified in the protocol prepared by a notary public. But, it may be adopted by an absolute majority of votes if the balance sheet prepared by the management board shows a loss exceeding the sum of supplementary and reserve capitals and 1/3 of the share capital. It is worth mentioning that the company’s agreement may specify the rules for adopting such a resolution in a different way. For example, by adopting a quorum, or another (but only higher) majority of votes to adopt a resolution.

The liquidation of the company begins upon the adoption of a relevant resolution. In such a resolution, it is also worth appointing persons who will act as liquidators. Another important provision concerns the way of representing the company by liquidators. This will enable immediate undertaking of liquidation actions.

Resolution of the shareholders on transferring the company’s registered office abroad

Such a resolution can be adopted on every stage of the company’s operations. It is adopted by the majority of votes which equals ¾. Additionally, a notary public’s protocol must include a relevant annotation about it. Determining the seat of the company is an obligatory element of the statute. Thus its transfer requires also a change to the statute.

Declaration of bankruptcy as a reason for dissolving a joint-stock company

Declaration of bankruptcy results from the company’s insolvency. The Act on Bankruptcy Law governs this process. Insolvency occurs when the company does not perform its pecuniary liabilities. It also occurs when the company performs the liabilities but they exceed the value of the company’s assets. It’s important to keep in mind that filing a bankruptcy petition does not automatically mean a declaration of bankruptcy. The court dismisses a petition if the assets of an insolvent debtor are not sufficient to cover the costs of proceedings.  The same effect occurs if the assets are sufficient to cover these costs only. The court may dismiss a petition if it turns out that the debtor’s assets are encumbered with a mortgage, pledge, registered pledge, tax pledge or marine mortgage to such extent that his remaining assets are not sufficient to cover the costs of proceedings.

It is also necessary to distinguish between liquidation bankruptcy and bankruptcy with the possibility of an arrangement. The latter takes into account the consequences for the further existence of the company. The goal of the proceedings involving the liquidation of assets is to remove the company from the Register of Entrepreneurs. In the case of bankruptcy with the possibility of an arrangement, the company preserves its entry into the Register. Moreover, it continues its operations. What is important, declaring bankruptcy will lead to the dissolution and removal from the Register only after bankruptcy proceedings are over. Upon declaration of bankruptcy, the company enters into a state of liquidation. The liquidation process will terminate its operations. Further proceedings should follow the provisions of the Act on Bankruptcy Law. 

Court’s ruling as a reason for dissolving a joint-stock company

The dissolution of a company may also result from the ruling of the registry court. It is issued at the request of a shareholder or the management board member if the company’s goal is impossible to achieve. Alternatively, if there were other significant circumstances resulting from the company’s relations. It may also happen at the request of a competent state authority if the company’s actions violate the law and threaten the public interest.

It is also worth noting that there is a possibility of a coincidence of liquidation conducted in accordance with the provisions of the Commercial Companies Code with liquidation provided for in the Bankruptcy Law. There is no doubt that the liquidation provided for in the bankruptcy regulations must precede the liquidation under the CCC. This results from the fact that its purpose is to evenly satisfy creditors. Thus, liquidation pursuant to the Code of Commercial Companies should be withheld. 

Other events provided by law as a cause for dissolution of the company

Among these reasons, one can indicate special situations that occur, e.g. in connection with mergers of companies. Obviously, in this case, liquidation is not carried out. Another example may be a sanction for infringement of Antitrust Law.

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What are the stages of company liquidation?

Liquidation shall be opened on the date on which the judgement on dissolution of the company by the court becomes final and non-appealable, upon adoption by the general assembly of a resolution on the dissolution of the company or the occurrence of other reasons for its dissolution (art.461 § 1 of the CCC).

The stages of ending a company’s operations after the occurrence of one of the aforementioned causes are as follows:

  • Appointing the liquidators

Upon the opening of the liquidation process, mandates of the management board members expire. They lose their powers to run the company’s affairs and represent it. Consequently, the liquidators take over their tasks. If there are no other provisions in the statutes or resolution of a general meeting, liquidators are the members of the management board.  But, if the court decides on liquidation, it may also appoint liquidators itself

In internal relations, the liquidators shall comply with the resolutions of the general meeting. Yet, this rule doesn’t apply to liquidators appointed by court.

  • Preparing a balance sheet for the opening of liquidation

Before undertaking any liquidation actions, liquidators must prepare an opening balance sheet. It must be submitted to the general meeting for approval. It is a financial statement that complies with the regulations of the Accounting Act The liquidation balance sheet should reflect all assets at their selling value. This is to divide the company’s real assets among the creditors, and then to divide the remaining part between shareholders.

  • Reporting the liquidation proceeding to the KRS and announcement in the Court and Economic Journal

The primary obligation of liquidators is to notify the registry court of the opening of liquidation. The liquidators have 7 days from the date of opening of liquidation to do that.  Once liquidation has begun, one should notify the registry court about this fact. This will result in providing the company’s name with an additional phrase, i.e. ‘in liquidation’. Another consequence will be deleting information about management board members and commercial proxies. Finally, information about liquidators and their manner of company’s representation should be provided. It is important to keep in mind that every liquidator has the right and duty to make such a notification.

  • Liquidation actions

Liquidators should close the current business of the company, collect the receivables, perform the obligations and liquidate the company’s assets. Liquidators may start new cases, understood, for example, as concluding new agreements with contractors, only if they lead to the conclusion of pending cases, e.g. order an external company to sell real estate belonging to the company in order to pay creditors. There is no specific time limit for liquidation. It lasts until all liquidation activities are completed.

  • Termination of the company’s operations

After completing the current business of the company, collecting receivables and settling liabilities, the remaining assets should be divided. Unless the agreement specifies otherwise, the division is made in proportion to shares held by the shareholders. It is possible to close the liquidation once the company ends its operations and after distributing the assets.

  • Liquidation report

The liquidators must prepare a liquidation report on the day preceding the distribution of the remaining assets. They then submit it to the general meeting for approval. This is the last stage that closes the liquidation. The liquidators publish the approved report at the registered office of the company. When approving the report, the shareholders should appoint a person responsible for the safekeeping of the books and documents of the dissolved company. In the absence of such designation, this person will be appointed by the registry court.

  • Submitting an application for deleting the company from the National Court Register

As the final step, the registry court must receive the approved liquidation report. An application to remove the company from the register should be enclosed along with it. The dissolution of the company takes place when the decision of the registry court on the deletion becomes final and binding. From this moment on, the company’s legal existence has officially ended.

Summary

As you can see, the process of removing a joint-stock company from the KRS is formalized and quite long. This results from the need to ensure proper protection for all creditors of the company. Another important reason is the requirement of fulfilling all public and legal obligations. Yet, in the absence of disputable situations and the company’s liabilities, this process will be simply formal. With proper preparation, it should not generate major problems for liquidators or shareholders. Close cooperation with the accounting services is crucial for successful liquidation. The goal is to identify the proper transferable values of the assets and to avoid errors in the liquidation balance sheet.

Plan to dissolve your company? You’ve already started the process of company liquidation and need help?

Liquidation of a joint-stock company embraces many steps and formalities. It requires a specific actions in a right order. Contact our law firm for professional support.

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Michał Piwoński

Senior associate / Attorney-at-law

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