The essentials of the supplementary liquidation of a private limited company

Upon the termination of a private limited company, the company undergoes liquidation. During the liquidation process, liquidators are appointed to carry out the liquidation procedures: the liquidation of the company is entered in the commercial register, the assets remaining at the end of the liquidation are distributed and thereafter, the private limited company is deleted from the commercial register. If the company has no assets at the time of deletion, the legal entity’s life cycle comes to an end, and it ceases to exist.

What happens if the liquidation fails to achieve its purpose?

However, a private limited company deleted from the register may not always have truly ceased to exist, because after its deletion it may turn out that the company still had assets that were not discovered during the initial liquidation process. Such situations often occur when a company has been deleted from the commercial register without liquidation proceedings due to failure to submit its annual report. It may also happen that a creditor appears who still has a claim against the company that was not satisfied during the previous liquidation proceedings. To resolve such situations, the Estonian Commercial Code provides for the possibility of supplementary liquidation.

The purpose of supplementary liquidation is to carry out the liquidation procedure once again, so that it becomes possible to, for example, sell property that has become ownerless in the meantime or to satisfy a creditor’s claim against the private limited company.

How to initiate supplementary liquidation?

In order to initiate supplementary liquidation of a private limited company that has already been deleted from the Commercial Register, an interested party (for example, a shareholder, a member of the management board, or a creditor) must submit an application to the court. The application must show that the deleted company indeed has assets that were not distributed during the initial liquidation proceedings, and that therefore supplementary liquidation measures must be carried out. If the supplementary liquidation is initiated by a creditor of the deleted company, the creditor must demonstrate to the court that their claim was not satisfied in the initial liquidation proceedings, that it cannot be satisfied by any other means, and that their claim could be satisfied if liquidation were reinstated. Alternatively, the creditor may prove that the company should not have been deleted from the register at all due to a dispute concerning the claim.

If the court considers the initiation of supplementary liquidation proceedings to be justified, it issues a ruling to that effect, reinstates the rights of the former liquidators or appoints new liquidators. In the application for initiating supplementary liquidation, the applicant should, when possible, indicate the preferred candidate for the position of liquidator. However, the court is not bound by this preference and is not obliged to appoint the suggested person. The court may appoint as liquidator any person who meets the requirements set out by law, who, in the court’s opinion, is capable of performing the duties of a liquidator to the necessary standard and who has given their consent to act as a liquidator.

The court may decide that the initiator of the supplementary liquidation or the private limited company itself must pay an advance to cover the costs of the liquidation proceedings and the liquidator’s remuneration, and that the court will supervise the liquidator’s activities. Therefore, the initiator of the supplementary liquidation must always be prepared to bear the expenses related to it. For this reason, the initiator should carefully consider whether the deleted company has sufficient assets for the supplementary liquidation to be economically worthwhile at all.

What actions are carried out during supplementary liquidation proceedings?

After the court decides to initiate supplementary liquidation, the private limited company is reinstated in the commercial register, its legal capacity is restored — according to the practice of the Supreme Court, even retroactively — and the liquidator begins carrying out the actions necessary for conducting the supplementary liquidation. According to case law, during supplementary liquidation, the liquidator should collect debts that were not previously collected, sell assets that were not sold, satisfy creditors’ claims that were not met, and distribute any remaining assets that were previously undistributed among the entitled persons. Case law does not specify whether the liquidator must also submit a liquidation report, an interim liquidation report, or publish a notice of liquidation in the Ametlikud Teadaanded. However, the courts have held that, in any case, a new final liquidation report and a distribution plan for the assets must be prepared. Nevertheless, it is advisable, in addition to these documents, to also publish a notice about the liquidation proceedings in the Ametlikud Teadaanded to avoid a situation where, after the supplementary liquidation, additional creditors come forward with claims against the company, which could lead to the need for a third liquidation procedure.

What are the rights and obligations of the liquidator?

The liquidator has the same rights and obligations as the management board of the private limited company. This means that the liquidator may represent the company and enter into transactions on its behalf that are necessary for the purposes of the liquidation proceedings. The liquidator also has the right to access all of the company’s documents, bank accounts, and assets. The liquidator must comply with a duty of care similar to that required of members of the management board of a private limited company. Therefore, the liquidator must act diligently and in an informed manner, refrain from taking unreasonable risks, act in accordance with the law and in the interests of the legal entity, and do so in good faith. The more specific and expert the liquidator’s knowledge is, the more thoroughly they are expected to comply with the duty of care.

During supplementary liquidation, various shortcomings in the former management of the private limited company may also come to light. This means that, in the course of conducting the supplementary liquidation, the liquidator may, for example, discover grounds for holding a former member of the management board personally liable, for example if a situation where the board member caused unjustified harm to the company during their term of office arise. For more information about the liability of a company’s management board member, see our firm’s article “Why refrain from using a tankist to liquidate a company?”.

It is also worth remembering that liquidation is an activity to which the regulations on money laundering, terrorism financing, and international sanctions may apply. Therefore, in certain situations, liquidation may serve as the starting point for a much more serious and stringent procedure. It is also possible that the shareholders and members of the management board of the private limited company may need to cooperate extensively with the liquidator to ensure compliance with the obligations arising from anti-money-laundering, counter-terrorism, and international sanctions regulations.

What are the consequences of supplementary liquidation?

Once the liquidator has completed all actions necessary for the supplementary liquidation — primarily selling the remaining assets of the private limited company and satisfying the creditors’ claims — they prepare a distribution plan for the assets. Based on this plan, the assets remaining after the liquidation proceedings are distributed among the shareholders in proportion to the nominal value of their shares, unless the company’s articles of association provide otherwise. The assets may be distributed six months after the entry of the company’s termination in the commercial register and the publication of the liquidation notice, and two months after the shareholders have been notified that the final liquidation report has been submitted for their review. After these steps have been completed, the liquidators submit an application to the commercial register for the deletion of the company. If all goes well, and the company truly has no remaining assets after this second attempt, it will be deleted from the commercial register and will no longer possess legal capacity.

If you need assistance with the liquidation of a company, feel free to contact the attorneys at Lepmets & Nõges Law Firm, who have extensive expertise to advise you in liquidation proceedings or even carry them out as liquidators.