Liquidation

What it means

Liquidation is the orderly winding up of a company that has assets to meet its debts. The general meeting decides, a liquidator is appointed, and entry into liquidation is recorded in the commercial register.

It differs from bankruptcy in its starting point: a solvent company is liquidated, whereas bankruptcy proceeds against the assets of an insolvent debtor. In liquidation what remains after settling debts goes to the members.

Not every dissolution of a company means liquidation. In a merger, the company is dissolved without liquidation because its assets and liabilities pass to the successor company. Liquidation is the route where there is no successor and the assets have to be divided between creditors and shareholders.

How it works in practice

The liquidator realises assets, settles liabilities, terminates contracts and employment, and invites creditors to lodge claims. An extraordinary set of accounts is prepared as at entry into liquidation, and another as at its completion.

There is a tax side: returns for shortened periods, closing VAT and other registrations. In practice, deletion from the register requires the tax administrator’s consent.

Before a liquidation is decided, we go through an overview with the client: which receivables still need collecting, what happens to the car and equipment, which contracts have a notice period and whether the taxpayer’s personal account shows any arrears. Only this overview shows whether the company can really settle its debts and whether liquidation is an option at all.

What to watch out for

Liquidation takes months, not weeks, and requires an advance to fund it. If it emerges that the company is over-indebted, the liquidator must file for bankruptcy - an orderly wind-up becomes different proceedings, with nothing of equity left for the members.

Selling assets to a shareholder or an acquaintance for a token price is a common shortcut that backfires. Between related parties the tax administrator can adjust the tax base to the usual price, and creditors who were not paid can challenge the transfer. Assets are therefore sold at a price the liquidator can defend.