1. Liquidation of a business/company - definition
Liquidation proceeding of limited liability companies (businesses, enterprises) serves to repay all creditors of the legal entity completely by realisation of their property. In case of any remaining property values thereafter, the members of legal entity are repaid from remained property in proportion to their share in the company.
Therefore, with the liquidation proceeding, the very intention of the company is changed. Whereas in ordinary circumstances, the main purpose of a business is to perform its registered activity in order to generate profit, in the process of liquidation all activities are oriented towards bringing a business to an end and eventually removing it from the Register of Companies. It follows from the foregoing that the purpose of this proceeding is to protect all creditors and members of the company being liquidated.
The Company Law of the Federation of BiH (Official Gazette of the FBiH, 81/15) and the Law on Liquidation Procedure of the FBiH (Official Gazette of the FBiH, 29/03) are two main pieces of legislation governing the process of liquidation.
2. Reasons for initiating a liquidation proceeding
The liquidation proceeding may be grounded in the following: a decision of the company’s members, an enforceable decision by which the company’s entry into the Register of Companies was declared invalid, death or liquidation of a company’s member (unless differently regulated by the Charter of Foundation), bankruptcy of the company, an enforceable decision on permanent prohibition of performance of the company’s activity etc.
3. How does the liquidation proceeding look like?
The liquidation proceeding is conducted by the registering court with which the subject company is registered. The liquidation proceeding is usually initiated pursuant to a decision taken by members of the company (company’s founders). In addition to the decision on initiating the process of liquidation, the competent court requires the following documents to be submitted: liquidation application/petition, decision on entering the company into Register of Companies and Tax Clearance Certificate issued by the Taxation Authority. In later stages of the proceeding, other official documents must be presented, such as: certificate on payment of contributions, issued by the Pension Insurance and Health Insurance Institutes, Balance Sheet and Profit and Loss Statement and statement of banking account.
4. Roles in the liquidation proceeding
The Liquidation Proceeding Act envisages roles of a liquidation judge and a liquidator. Upon receiving the liquidation petition, the liquidation judge usually appoints a member of the company’s Management Board (Director) or a company’s lawyer (if authorised by the company) to act as a liquidator.
The liquidator is tasked with finalising all ongoing processes, such as: collection of all claims of the company, realisation of the company’s property and payment of creditors.
Besides, the liquidator is also obliged to present the list of company’s assets and liabilities to the liquidation judge, whereby the latter includes rights of any third entity over the company’s assets (for example, rights of a bank-lien holder).
When it comes to assets distribution, the liquidator must first pay any outstanding court expenses and court fees, expenses of the company’s Management Board and costs necessarily incurred by the Management Board.
5. Payment to creditors (distribution of assets)
The liquidator shall be settling the creditors’ claims in proportion to their share in the claims total, as soon as sufficient funds are available. If claims of some creditors are not covered by an enforcement order, they have 15 days to prove bringing of an action, in which case the liquidator allocates the funds for those claims in the process of assets distribution. However, if the creditor does not prove the claims, they shall not be taken into account in assets distribution.
The liquidator shall, if requested so by the court, report on all actions undertaken and present written certificates to the court for consideration, at the latest after finalisation of the assets’ distribution process.
It is important to mention that the liquidator is personally accountable for the violation of his/her obligation to perform the most efficient realisation of the company’s property and to distribute the collected funds evenly.
6. Finalisation of the liquidation proceeding
Upon presentation of the evidence that overall assets of the company have been duly distributed, the liquidator is relieved of his/her duty by the court and the proceeding is closed and that is announced in the Official Gazette of the Federation of Bosnia and Herzegovina. Once the closure of the liquidation proceeding becomes enforceable, the court orders the limited liability company to be removed from all public registers.
7. Bankruptcy vs. liquidation proceeding
Bankruptcy is a special proceeding that is conducted when the debtor is overindebted and thus not able to repay the debts. The main purpose of the proceeding is collective payment of the creditors by realisation of the debtor’s property and distribution of the collected funds to the creditors. As a rule, the bankruptcy proceeding ends in cessation of the debtor-legal entity, but in some cases, it may result in reorganisation of the debtor’s operations and acceptance of the bankruptcy plan by the creditors.
On the other hand, companies that are subject of a liquidation proceeding are solvent, unlike the companies that are subject of a bankruptcy proceeding, and are absolutely able to settle claims of all their creditors with their own assets.
Liquidation is actually the very last stage in the lifecycle of the company before it is removed from the Register of Companies. If it is established in the course of liquidation proceeding that the company’s assets may not cover all the liabilities, a liquidation proceeding is opened.
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