Compulsory liquidation of a legal entity

Mar, 04 2020

Russian law provides for several types of companies’ activity termination. A legal entity may be wound up by decision of its participants or the court. In the first case, company ceases to exist in connection with the expiration of the period for which the enterprise was created, or in connection with the achievement of the purpose of its operation. For example, if a company was created to implement a construction project, after putting the facility into operation, the company may officially cease to exist.

If it is a court decision, the organization may be liquidated on the following grounds:

  • if the court satisfies the claim of the state authority;
  • if the state registration of an enterprise is recognized by court as invalid, including in connection with violations of the law when creating a company;
  • when the company operates without special permission or in the absence of mandatory membership in a self-regulatory organization or the necessary certificate of admission to work;
  • if the company violates the law, engages in illegal activities, and this fact will be proved in court;
  • when a public, religious organization or foundation carries out activities that are contrary to the goals stated in their articles of association;
  • on a claim of the company’s member, if he can prove the inability of achieving the goals for which the legal entity was created, including if further work of the company is getting complicated.

It is notable that if bankruptcy proceedings are instituted against the company, even the most justified lawsuit to terminate the organization will not be satisfied. Also, apart from all the above grounds, the Civil Code provides for other reasons for the termination of company which may contain references to various federal laws. Thus, cases of compulsory liquidation of a legal entity can be divided into several categories:

1) Judicial liquidation of commercial organizations. In this case, the procedure will depend on the legal form of the company. For example, according to the Federal Law “On Limited Liability Companies”, an LLC can be terminated on the basis of violation of the ratio of net assets to authorized capital. Also, a credit company can be officially liquidated if the Central Bank revokes its license.

2) Judicial liquidation of non-profit organizations. It has its own specifics: for example, the law “On Public Associations” stipulates that an enterprise can be wound up if it violates the human’s rights and freedoms. A political party may cease to exist by a court decision if it has not participated in elections for seven consecutive years.

3) The judicial termination of business and non-profit organizations. For example, the law “On countering extremist activity” applies equally to public and religious associations. Based on its violation, it is possible to liquidate an enterprise if it can prove that it is associated with extremist activity.

Compulsory liquidation of a legal entity is one of the most serious measures that can be applied to companies and enterprises. After the official termination of existence, a legal entity cannot make any agreements, take and give loans, sell and buy property, securities.

What authorities can initiate liquidation of the organization?

  • registration authorities,
  • tax,
  • antitrust,
  • prosecutor’s office,
  • central bank.

The procedure for the compulsory liquidation of a legal entity

The procedure starts with a lawsuit from the authorities, which may have claims against the company. That is, when the credit institution is liquidated, the initiator is the Central Bank. If the company violates the antimonopoly legislation, the Federal Antimonopoly Service begins the process. The tax authorities can also initiate the termination of the enterprise in court: for example, if the legal entity violates the law.

The creditors of the enterprise are also entitled to initiate legal proceedings. However, most often the issue of terminating companies is raised by the Federal Tax Service or its representative offices. However, the lawsuit against the company will not necessarily be satisfied, and in addition, the court decision can be challenged in higher instances.

What is the legal procedure for the compulsory liquidation of a legal entity? The procedure may vary depending on the legal form of the enterprise, for limited liability companies the procedure is as follows:

  • Adoption by the competent authority of a decision on the official liquidation of the enterprise, its removal from the register.
  • Notification of the company’s termination through the official press.
  • Liquidation of a company in 3 months after publishing the notice about liquidation.

A distinctive feature of winding up the LLC is that the founders of the organization do not risk personal property, their own accounts, real estate. They cannot be confiscated to repay LLC debts. However, the law and the organization’s articles of association may provide for founders’ subsidiary liability.

The difference between voluntary and compulsory liquidation of a legal entity

It is possible to voluntarily liquidate an enterprise if it functions without violating the law and is capable of paying off debts to creditors and the state. That is, you cannot choose between the liquidation of the organization and bankruptcy. If there are debts that cannot be repaid, you will have to declare bankruptcy.

Voluntary termination of an organization is a complex and time-consuming process. In accordance with the Civil Code, the founders of the company or the executive body authorized by them are the initiators. In this case, the procedure differs significantly from compulsory measures, although there are some similarities:

1) The members of the company make a decision to terminate its activity.

2) Liquidation commission shall be appointed, which will deal with all financial and bureaucratic issues related to the removal of the organization from the registry.

3) A notice of termination of activity is published in the official body, as well as personally delivered to each creditor. This is a mandatory step, which is provided for by the law “On state registration of legal entities and individual entrepreneurs”. After that, lenders have 2 months to demand a return of debts. All creditors are entered in a special register, in accordance with which they will then repay debts. If lenders have not made a claim before drawing up an interim liquidation balance sheet, the amount of debt is credited to the company’s income. But a notice of the preparation of an interim liquidation balance sheet cannot be presented before borrowers claim.

4) Form an interim balance, in accordance with which the company will settle with borrowers.

5) Pay debts, fulfill obligations to creditors and partners.

6) Form the final liquidation balance sheet. All financial calculations are carried out by the liquidation commission before making an entry in the Unified State Register of Legal Entities on the official termination of the enterprise. In order to stop operating, the balance should be “zero”.

7) Submit to the tax authority a package of documents, which includes a statement, balance sheet, receipt of payment of state duties, confirmation from the Pension Fund.

A company voluntarily stops to exist if all its founders, without exception, realize that continuing to work is pointless or irrational. In other words, this is an initiative of those who are responsible for the enterprise, while the compulsory liquidation of a legal entity is a sanction that applies to violators of laws – the debtors. It is considered one of the most stringent measures of public enforcement .

VALEN will help to avoid the termination of your company by court order. We will provide the necessary information to the Unified State Register of Legal Entities, as well as successfully handle tax audits, advise your employees, and represent the interests of the company in court.

For consultation please contact our lawyers via website or by phone: +7 (495) 7-888-096! We are also looking forward to meeting you at our office in Moscow.

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