26 November 2019
Nowadays, the set-up of a company is a relatively simple and quick process in Hungary. What happens, if an existing company ceases its activity, or the activity planned upon inception has never started or otherwise the company becomes obsolete, and is of no further use for its member(s)/shareholder(s)? Even in this case there are tasks and duties occurring in connection with the company, like keeping its accounting records, filing of tax returns, maintaining bank account and registered seats, etc.. What can a member/shareholder do, if he does not intend to undertake these responsibilities or relating costs any further? In this case, the member/shareholder can target the sale of the company, or alternatively its voluntary liquidation.
The sale of a company with no or limited activity is generally a challenge, mainly because it can carry certain risks from the past, that might remain unknown for the investor. As the inception of a company is a quick process, therefore only few investors with specific agenda would choose the purchase of an existing entity instead of founding one.
Should the member(s)/shareholder(s) of a company come to the idea to do something about its/their non-operational company, a more realistic scenario is the voluntary liquidation of the entity. The liquidation process covers basically ceasing an entity without a legal successor. At the end of the liquidation process, the net assets of the company remaining after the fulfilment of its obligations toward its creditors, will be distributed to/among its member(s)/shareholder(s).
In Hungary today the voluntary liquidation of a legal entity is a fairly complex process. Having said that, with proper organisation and preparation it can be executed pretty efficiently. The end result would be, that there are no obsolete entities in the investment portfolio.
Based on Law V. of 2006. on Public Company Information, Company Registration and Winding-up Proceedings allows beside the general procedure, the so-called simplified voluntary liquidation process. In the current publication we summarize the legal regulations relevant to the general voluntary liquidation process of a company, while the second part of the publication will also touch the simplified process, and certain related topics.
1. Start of the voluntary liquidation process
1.1 The voluntary liquidation process, and its timing shall be resolved by the general meeting of the company. The resolution shall include the following:
- The intention to cease the company without legal successor
- The new name of the company referring to being under voluntary liquidation process
- The instruction for the voluntary liquidation, and determining the starting date (“Starting Date”) of the process
- Appoint the liquidation officer (who should make a declaration on the acceptance of the position, and on the lack of any conflict of interest)
- The fee of the liquidation officer, or its courtesy basis
- Recall the executive officers of the company (also in the case, when the liquidator is the same person as the previous executive officer)
1.2 Based on the shareholder(s)/member(s) resolution, the former executive officers of the company have the below listed legal obligation in connection with closing its business activity:
- The executive officers shall close the company’s activity as of the day before the set Starting Date, and report in the financial statements prepared in line with the Accounting Act. The Financial statement has to be published. There are specific tax obligations in connection with closing the company’s activity, that is also the responsibility of the executive officers.
- In certain cases further obligations can arise due to specific legal regulations or contractual liabilities of the company related to the start of the voluntary liquidation process. Such obligations are also the responsibility of the executive officers.
- The executive officer should prepare an inventory list of documents classified confidential or non-disposable. The list, and all documentation of the company shall be transferred to the wind up officer, while informing him about the open issues.
- Furthermore the executive officer shall inform the employees of the company, including the trade unions and the Workers Council.
The deadline for the above duties of the executive officer is the 30th day from the starting date of the voluntary liquidation process. The executive officer is legally liable to comply with the above deadline, and performing the listed activities with good care.
1.3 The liquidation officer shall be considered as the executive officer and legal representative of the company as from the starting date. Main responsibilities in connection with the kick-off of the voluntary liquidation procedure is the following:
- To file the corporate documents prepared in connection with the resolutions of the general meeting detailed in point 1.1. with the Court of Registry. Based on such documents the Court will register the start and details of the voluntary liquidation, and also publishes the relevant information.
- By the 15th day from publishing the voluntary liquidation, the liquidation officer shall inform (i) all bodies maintaining public registers, in case any asset of the company is registered therein (generally: real estate, company participations, foundations); (ii) the employee market authority and the environmental authority; (iii) the banking relations of the company; (iv) the executive officers or representing body of the entities, foundations and associations in which the company has a participation; (v) authorities and courts involved with ongoing proceedings.
- Creditors can inform the liquidation officer about their claims against the company within 40 days starting on the publication day of the voluntary liquidation. As the 40 days passed, the liquidation officer shall prepare a summary about the claims received within the next 15 days. The claims has to be ranked (acknowledged, disputed…). The summary of claims has to be filed with the Court of registry. The liquidation officer within 45 days shall also inform the respective creditors about the ranking of their claim.
- Should the net asset of the company do not cover the total of the creditor–claims, and the missing amount is not paid in to the company within 30 days by the member(s)/shareholder(s) the liquidation officer shall request to turn the voluntary process to a statutory liquidation process.
2. Actions during the voluntary liquidation process
During the voluntary liquidation, the main responsibilities of the liquidation officer are the ones listed below with a primary focus on the asset protection of the company:
- Understand the financial position of the company
- Collect outstanding receivables
- Fulfil liabilities
- Closing contractual relationships, enforcing rights
- Sale of assets, as it might become necessary
- Continue the limited business activity of the company in line with the relevant decision of the general meeting
- Comply with accounting and tax obligations, as required by relevant regulations
3. Ending the voluntary liquidation process
3.1 Should the liquidation officer finish with its tasks and duties in its capacity, he can designate the closing date of the liquidation process. As of the designated closing date, the liquidation officer shall prepare the financial statements of the company, and file its tax returns. The financial statement should include the assets and liabilities of the company at their fair market value. Any accounting result deriving of the fair market valuation shall be recorded in the profit and loss statement of the last accounting period.
3.2 The liquidation officer shall ensure that the financial statements, tax returns, asset distribution proposal, and his proposal regarding the entities, foundations or associations operating with the participation of the company are approved by any supervisory body or auditor acting at the company. Such approved documents shall also be approved by the general meeting of the company.
3.3 The liquidation officer files the cancellation request with the Court of Registry based on the approval of the general meeting, publishes its closing financial statements, files the relevant tax returns and settles any due taxes.
3.4 The Court of Registry reviews the cancellation request, and upon executing the cancellation it also takes measures that the cancellation is published. The company ceases to exist with the cancellation from the company registry. The Court of Registry is entitled to cancel the company, the earlier it received an electronic notice from the Tax Authority, that there is no ongoing authority process, and it initiates no audit or execution process, or 90 days passed since the publication of the closing financial statements. Should the tax authority inform the Court of Registry about an ongoing process, the initiation of an audit or an execution process, or the company otherwise has any public due, the cancellation shall not be executed, until the final and binding ruling of the Tax Authority regarding the closing of such processes, and its report on the company having no public due.
3.5 The liquidation officer shall execute asset distribution towards the member(s)/shareholder(s) as approved by the general meeting.
This publication detailed the general process of the voluntary liquidation. In the second part of the article we will summarise the simplified voluntary liquidation, introduced on 1 July 2018, and we will discuss certain interesting topics or questions related to the voluntary liquidation.