While a company can be established within minutes, in Estonia, it is quite another matter when one wants to wind it up – liquidation procedures being so complex and paper-consuming that a vast part of entrepreneurs opt to just stop filing their annual reports, the companies automatically deleted from the commercial register within a couple of years.
According to sworn auditor Mai Palmipuu, it is surprising, considering the situation, that company liquidation proceedings are used at all. As, in the case of compulsory dissolutions, nothing whatsoever needs to be done.
«A company entered into compulsory solutions list will be deleted from the commercial register if, following the publication of compulsory dissolution notice, no liquidator has been appointed nor bankruptcy declared by the company,» explained Ms Palmipuu. «Such a simple compulsory dissolution procedure fosters unfair competition as it becomes evident that, should a business fail, it would be deleted from the commercial register anyway – without moving a finger.»
Pressure from many angles
A couple of years ago, the said complexity was also pointed out by Chamber of Commerce and Industry. This year, in mid-summer, Ministry of Justice launched coordination of amendments to Commercial Code and other laws related to that, offering entrepreneurs free from debt-claims the option of faster voluntary liquidation by merging assets of legal persons with these of the physical ones.
In essence: should a company have a sole holder desiring to quit business, he could transfer the company money to a physical person. In that case, no liquidation proceedings need to be carried out by private or public limited companies, these being dissolved by merger. Since 1994 already, such a rule is in force in Germany.
At that, it must be noted that transfer of company assets will burden the physical person with limitless personal responsibility for the company’s existing and future liabilities. Even so, limitation periods prescribed by Civil Code Act will remain in force.
Naturally, there may be no bankruptcy petitions or declarations of bankruptcy with companies in question; physical persons involved may not be insolvent.
According to Mait Palts, director general of Chamber of Commerce and Industry, the proposal seems prudent and without apparent weaknesses. «Ideally, this may indeed work,» he said.
It being questionable, however, if an owner would indeed be willing to personally settle possible claims arising from complex deals or guarantees. «But, provided the company to be liquidated is problem-free – everything has been finished up, no liabilities remaining – there should be nothing to fear,» explained Mr Palts.
Good for the state
The director general also underlined that such mergers may only happen in case of sole owners. However, Estonia has close to 56,000 private and public limited companies with multiple owners. The Commercial Code draft amendment states that dividing company assets between numerous persons would be too complicated; in cases of quick liquidations, owners ought to be able to agree who will bear the hypothetical liabilities.
«This would be a forced move... meaning that, should the need for liquidation indeed be urgent, people would agree that one will sell his share to the other guy. A visit to a notary could be considered, signing an agreement on liability based on joint and several liability,» reckoned Mr Palts.
Mai Palmipuu, the sworn auditor, doubts whether a company’s merger with assets of a physical person would ensure protection of creditors. In her view, it would not be basis enough for mergers – physical persons simply claiming not to be insolvent. In the sworn auditor’s opinion, mandatory assessment of the merging parties’ financial situation by sworn auditors would provide for added trust.
According to Külliki Feldman, private law advisor at Ministry of Justice, they are currently busy with further analysis of a need for stronger protection of creditors – while also considering opinions filed regarding the draft. An option would be penal power based liability of insolvent physical persons pursuant to Penal Code section 384 (causing insolvency).
According to Mr Palts, simplification of liquidation would also benefit the Estonian state and Statistical Office. «Presumably, we would get a clearer picture of operating companies,» said he.
Commercial Code discussions have received input from three ministries and nine interest groups. Responses received from the initial coordination round are currently being processed at the Ministry of Justice.