Legal
6 August 2019

Simpler liquidation of corporations?

The government approved a draft decree aiming to simplify the liquidation process for legal entities from an administrative and financial viewpoint. Some entities will be entirely released from their duty to publish the date of their entering into liquidation in the Business Journal, some only partially. Owing to the complexity of the entire liquidation process, however, the declared simplification is of a rather cosmetic nature, in the majority of instances not bringing the desired relief for companies in liquidation or liquidators.

Lucie Patková
Karolína Tomsová

Some issues concerning the Business Journal will be modified effective from 1 August 2019, among other things, the method of publishing a notification about entering into liquidation. Currently, all legal entities in liquidation must publish, twice and for a fee, a notification about their entering into liquidation in the Business Journal, including a call for creditors to lodge their claims. In the case of legal entities recorded in registers other than the Commercial Register, this duty will entirely be replaced with the free-of-charge possibility to publish information about entering into liquidation and a call for creditors in a public register over a period of three months and two weeks. For corporations recorded in the Commercial Register, this will replace one mandatory notification in the Business Journal.

The standard process of liquidating corporations is administratively highly demanding; consequently, one less duty of publication in the Business Journal will not substantially help either the liquidator or the company in liquidation, not even financially. The fee saved for one publication in the Business Journal amounts to thousands of Czech crowns, which is a negligible amount for the majority of companies in liquidation.

The Ministry of Justice justified the change claiming that the information published in a public register, i.e. a source available to the wide public, may fully replace the notification in the Business Journal. However, this raises the question why the duty to publish a notification in the Business Journal should not also be waived for legal entities recorded in the Commercial Register. It should be also noted that companies entering into liquidation must notify of this fact not only their creditors but also some state bodies such as the tax authority and the social security administration. If a notification in a public register is sufficient for private persons, why not regard it sufficient towards state administration bodies? Abolishing the duty to notify these bodies would help liquidators facilitate the process of liquidation from an administrative viewpoint more than the reduction in the number of obligatory publications in the Business Journal.  

The change under preparation will thus help only those legal entities that do not have any debt, assets and employees, are recorded in a register other than the Commercial Register and their motivation to enter into liquidation is reduced by the expectation of costs associated with the entire process. Compared with this, the liquidation of properly functioning companies recorded in the Commercial Register is a very complex process, highly demanding in terms of legal, tax, and accounting aspects.

Where the management of a corporation considers liquidation, it should take into account the fact that the termination of business activities during the process of liquidation is more demanding administratively than their termination prior to the liquidation. Once a company enters into liquidation, the statutory body’s power is practically suspended. It is only possible to perform steps leading to the completion of liquidation while proceeding in close cooperation with the liquidator. Only companies that have duly prepared themselves for liquidation, becoming only shells of their former selves before the process commences, can pass through liquidation easily and formally. Even then the process usually takes at least four months. 

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