Termination of Legal Entities: Reorganization and Liquidation
Legal entities may cease to exist in two ways: through reorganization or liquidation. The difference between these methods lies in the fact that in the case of reorganization, rights and obligations (liabilities) are transferred. The transfer of rights and obligations (liabilities) means that the rights and obligations (liabilities) of one legal entity are passed on to another legal entity (or entities), which continues the activities of the reorganized legal entity. In the case of liquidation, rights and obligations (liabilities) are not transferred, except in cases provided by law, and the activities of the legal entity are terminated. Liquidation may be voluntary — when the participants of the legal entity decide to terminate its activity — or compulsory.
The grounds for liquidation of a legal entity may be the following:
- The decision of the participants of the legal entity to terminate its activity;
- A court decision or a decision by the creditors’ meeting to liquidate a bankrupt legal entity;
- A court decision to liquidate a legal entity if an expert report indicates that the activity of the legal entity (or its governing bodies or their members) is inappropriate;
- A court decision to liquidate a legal entity if the entity registered in the register has not updated its data in the Register of Legal Entities for five years, and there is reason to believe that it is not conducting any activity;
- Expiry of the term for which the legal entity was established;
- Reduction in the number of participants in the legal entity below the minimum required by law, if within six months no decision is made to reorganize or restructure the entity;
- Recognition of the legal entity’s establishment as invalid.
The decision to liquidate a legal entity is made by a qualified majority of the votes of the participants of the legal entity. This majority is determined by the founding documents of the legal entity and may not be less than 2/3 of the votes of all participants present at the meeting.
Participants of the legal entity, the meeting of creditors, the administrator of the Register of Legal Entities, or the court, having decided to liquidate a legal entity, must appoint a liquidator. The founding documents or legal acts may establish different rules for the appointment of the liquidator or designate a specific individual. These rules are not binding for the court, the creditors’ meeting, or the register administrator. The liquidator may be a person with appropriate qualifications. Multiple liquidators may be appointed. In that case, a liquidation commission is formed, and one of the liquidators is appointed as the chairman.
The liquidator appointed by the participants of the legal entity may be removed by a simple majority of votes of the participants present at the meeting.
A legal entity under liquidation may enter into only those transactions that are related to the termination of its activities or are provided for in the decision to liquidate the legal entity.
The person who made the decision to liquidate the legal entity must, in accordance with the statutes of the legal entity, publicly announce this decision three times at intervals of no less than thirty days, or announce it once publicly and notify all creditors in writing.
When a legal entity is being liquidated, creditors’ claims are satisfied in the following order:
- First, claims secured by a pledge on the assets of the legal entity are satisfied – from the value of the pledged assets;
- First priority is given to employees’ claims related to employment relationships; compensation for injury, health damage, occupational disease, or death due to a workplace accident; claims by natural persons for agricultural products purchased for processing;
- Second priority – claims related to taxes and other payments to the budget, as well as mandatory state social insurance and health insurance contributions; and foreign loans guaranteed by the state or government;
- Third priority – all remaining creditor claims.
Claims of the next ranking group of creditors are satisfied only after the full satisfaction of the claims of the previous group. If there are insufficient funds to satisfy all claims within a group, those claims are satisfied proportionally according to the amount due to each creditor.