Liquidation of a legal entity: responsibility

Feb, 02 2022

Contents:

The reason for closing a business may be a financial collapse, changes in the industry, or simply the desire of the owners. For the actual termination of the company’s activities, it must be liquidated: officially delete information about the company from the state register. This is a multi-step process that can take even longer than business registration. The procedure for the liquidation of a legal entity and the liability of the owners associated with this procedure depends on the legal structure and financial situation.

What is subsidiary liability

To begin with, let’s consider how the law establishes the responsibility of the director after the liquidation of a legal entity, if we are talking about a limited liability company. Neither the managers nor the founders in this case are obliged to answer for the debts of the business. To settle with counterparties, you should use the authorized capital, as well as the property and funds of the enterprise itself.

However, the director and the founders may have subsidiary liability. It occurs when the company is officially excluded from the state register, and it formally does not exist, but at the same time there are debts to suppliers or other counterparties. In such situations, the director and the founders must cover the costs from their own funds.

The issues of subsidiary liability are regulated by the Civil Code. To better understand the issue, let’s look at the very procedure of liquidation of the company. Its first stage is the adoption of a decision on the abolition of the business and the creation of a liquidation commission. Within three days after the decision to close the company, the commission must notify the state authorities. If you violate these deadlines, you will have to pay a fine, or the authorities will issue a written warning to the founders.

As long as the company is in the Unified State Register of Legal Entities, it must keep tax and accounting records, even if it actually no longer works and does not make a profit. Liquidation is completed only when the abolition of the business is displayed in the register. Until then, the liquidation commission must pay all debts, including debts to employees, and submit a written report on these payments to the tax authority.

Subsidiary liability occurs for persons who are authorized to make decisions if the company’s property is not enough to pay off debts. Also, this type of responsibility may affect employees of state bodies. Subsidiary liability is not a debt obligation, it occurs when the firm cannot pay off the counterparties, and provided that the authorized persons have done something that made payments impossible. This includes the responsibility of the liquidator after the liquidation of the legal entity.

For which the administrative responsibility was strengthened when closing a business:

  • Indication of false information when submitting to state registers.
  • Repeated submission of false information to government agencies.
  • Refusal to provide data for the registry.

However, the founders and the director of the company will be criminally liable for intentional bankruptcy. Therefore, it is not necessary to initiate bankruptcy proceedings only in order not to pay debts (as required by the voluntary liquidation of the business).

In which case the director and the founder are responsible for the debts of a closed LLC

To combat one-day companies, the law provides for such a measure: if a company does not file tax reports and does not use accounts during the year, tax inspectors may recognize it as non-working and exclude it from the registers. In this case, interested persons and enterprises have the right to collect debts from the heads of the enterprise, but only on condition that these debts appeared due to unreasonable and unfair actions of top management.

Formally, after the liquidation of a legal entity, creditors can send possible claims to controlling persons. These are the people who actually give instructions and coordinate the work of the company, acting through nominee managers. However, it is extremely difficult to prove in court that this or that person is a controlling person.

But if the founder and the director are different people, and both of them are responsible for debts, this will become a difficulty for counterparties. After all, according to the letter of the law, they are equally responsible for the debts of the company. Accordingly, creditors can make claims to both the director and the founder. Lawyers in such cases recommend contacting someone who is more solvent, then giving managers the opportunity to resolve financial issues among themselves.

What does “unfair” and “unreasonable” mean

So, we found out that when the company is abolished, the director and founders may be responsible for their own unreasonable and unfair actions. But what actions and decisions should be considered as such? After all, we are talking about evaluation characteristics, and judicial practice on this issue is still being developed.

The Arbitration Court will consider delays in filing tax reports unreasonable and unfair. Also, the court may side with the debtor if the managers knew about the debts, but did not even try to pay them, and if they did not consider it necessary to initiate the liquidation of the company in time. There were cases when the courts took the side of counterparties, when one of the founders of the business created a company with a similar name and began to conduct all business through it.

It is the counterparty who is obliged to prove in court that the managers of the debtor company behaved in bad faith. However, the plaintiff has a fairly high chance of defending his interests if the founder knew about the company’s debts and specifically left it, handing over the cases to the nominal head.

How to protect yourself from subsidiary liability

In order not to risk your own finances, it is necessary to comply with the requirements of the tax authorities, not to allow the forced exclusion of the company from the register. Adhere to legal methods of settlement with counterparties and consult with experienced lawyers when deciding to close the company.

Author of the article
Liquidation of a legal entity: responsibility
Valentina Khlavich
Managing Partner
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