Applying expertise. Liquidation of a business organization

Applying expertise Liquidation of a business organization

Applying expertise Each of our clients faces his own unique combination of challenges at the markets of Eastern Europe. We are committed to support clients with much empathy at all stages of their personal positioning. Our clients benefit from our experience of over 20 years at Eastern European markets. They can rely on our experts and extensive know-how. Rödl & Partner We are also able to reach out to the wealth of experience. Ultimately the tradition of human towers has been in existence for over 250 years. Thus the young generations can study the knowledge of those who are older. The total group benefits from that knowledge. Castellers de Barcelona

Liquidation of a business organization

Liquidation of a business organization The two most popular forms for business operations of foreign investors in Russia are establishment in Russia of: (1) a representative office or a branch of a foreign legal entity; or (2) a Russian subsidiary with the legal status of a limited liability company or a joint stock company. Unfortunately, profits actually generated by business operations in Russia can differ dramatically from the foreign investor s expectations at the time of decision-making regarding entry to the Russian market. So a foreign investor can sometimes decide to terminate operations in Russia. Such a decision gives rise to questions regarding steps to be taken, the duration of the process and minimization of risks connected with exit from the Russian market. This article dwells on the specific features of liquidating a Russian business organization and closing a representative office or a branch of a foreign legal entity. Liquidation of a business organization Core pieces of legislation that regulate liquidations of operating business organizations are the Civil Code of the Russian Federation (further the Civil Code ), Federal Law On limited liability companies no. 14- FZ of 8 February 1998 (further the LLC Law ), Federal Law On joint stock liability companies no. 208-FZ of 26 December 1995 (further the JSC Law ). Federal Law On insolvency (bankruptcy) no. 127-FZ of 26 October 2002 finds application in the event a business organization becomes insolvent (bankrupt). Liquidation of a legal entity means its shutdown without transfer of its rights and obligations by way of succession to any other party. A business organization can be liquidated: In a private dissolution based on a decision passed by the company shareholders or a duly authorized body of corporate governance, including a solvent liquidation i.e. liquidation due to expiry of the limited company duration announced at its establishment or due to achievement of the declared company purpose. The law provides a non-exhaustive indicative list of possible grounds for a private dissolution of a business organization; in other word, a private dissolution is also possible for other grounds at the discretion of shareholders or as provided for elsewhere in the law. Compulsory liquidation initiated by the duly authorized state or municipal authorities and based on a court decision. 4

Valid grounds for compulsory liquidation include: Gross violations of the law that have been committed during the establishment of the company and cannot be remedied; Any activities subject to licensing that are performed without the required license (authorization), or activities prohibited by the law, or activities infringing the Constitution of the Russian Federation; Other repeated or gross violations of laws and statutory regulations; Other situations provided for in the Civil Code. A private dissolution is a rather lengthy and formalized process that includes a number of mandatory steps described in the below. Decision to wind up the company and to appoint the liquidation committee at the discretion of company shareholders The private dissolution process starts with the decision of company shareholders to dissolve the company privately and to appoint a liquidation committee. This decision is within the exclusive authority of the general meeting of shareholders and cannot be delegated to any other body of corporate governance. The move to vote the decision to dissolve the company privately can be made by the board of directors (supervisory board) of the company and in limited liability companies also by the management or by any shareholder. In a limited liability company, the decision to dissolve the company privately requires a unanimous vote of all shareholders. Any other decision regarding private dissolution (on the appointment of the liquidation committee; on the approval of the liquidation balance sheet) requires a simple majority of the total shareholder votes (unless the company articles of incorporation require a higher qualified majority vote for such decisions). In a joint stock company all the above decisions are made by the general meeting of shareholders and require a qualified majority of ¾ of the total voting shares participating in the meeting. The decision on private dissolution of the company should specify the liquidation procedure and timeframe. The total authority to manage the affairs of the company is deemed transferred to the liquidation committee upon its appointment. The liquidation committee acts on behalf of the company in any dealings with courts. 5

Notification to the registering authority Company shareholders or the body of corporate governance that has issued a decision to dissolve the company is under an obligation to notify this decision in writing within three days of the date thereof to the relevant territorial office of the registering authority and enclose the decision on private dissolution. Dissolution should be notified on the prescribed form. Based on such notice, an entry will be made to the Unified State Register of Legal Entities ( EGRUL ) that the company is in the process of liquidation. Next to the notification of liquidation to the registering authority, a notice should be given of the establishment of the liquidation committee and the relevant decision should be enclosed to it. Based on this notification, an entry will be made to the Unified State Register of Legal Entities regarding the establishment of the liquidation committee in the company, including the information on the head of the liquidation committee. As soon as an entry is made to EGRUL regarding the start of the liquidation process in a certain company, it is not allowed to perform state registration of any amendments to the bylaws of the company or to register any company where the company in liquidation is a shareholder or any company emerging as a result of reorganizing the company in liquidation. Notification to the territorial tax office supervising the company Furthermore, the company in liquidation is under an obligation to notify the liquidation decision in writing within three working days of its date to the relevant territorial office of the tax authorities. The mandatory form to be used for this notice has been approved by order of the Russian Federal Tax Agency. The Tax Code says that the tax office can decide to perform a field tax inspection of the company in liquidation. This field tax inspection can be performed notwithstanding the timing or scope of the previous tax inspection. The scope of this field tax inspection is limited to three calendar years preceding the year of the decision to perform it. Notification to social insurance funds The company in liquidation is under an obligation to notify the liquidation decision in writing within three working days of its date to the relevant territorial offices of the Pension Fund and Social Security Fund of the Russian Federation. 6

Notification of the started liquidation process to the bank servicing the company The liquidation committee notifies the start of the liquidation process to the bank servicing the company and files with the bank a new sample signature card with the sample signature of the head of the liquidation committee. Publishing of an announcement on company liquidation The liquidation committee is under an obligation to have an announcement on the liquidation of the company published in a specialized printed medium (gazette) that publishes information on state registrations of legal entities. As at the day of preparing this article for print, this printed medium was Official Gazette of State Registration (Russian name: «Вестник государственной регистрации»). Such an announcement on liquidation should include information on the name of the company in liquidation and on the procedures and deadline for filing of eventual creditor claims. This deadline should not be less than two months after the day on which the announcement on company liquidation appears in print. Termination notices to employees Another mandatory step is to give a personal notice of future termination to each employee, who should acknowledge its receipt with his/her personal signature. Employees absent from their working places with a valid excuse (sick leave, paid leave) should be given a notice of future termination in a registered letter with delivery confirmation. Notification to the local office of the Employment Service The Employment Service should also be given a notice of forthcoming dismissals. This notice should indicate the number of employees to be dismissed, reasons for their dismissal and other information required by the law. A notice to the Employment Service should be given two months (three months in the event of mass dismissals) prior to the scheduled dismissal day. Dismissal of employees Employment contracts with employees of the company in liquidation should be terminated in compliance with the terms and conditions prescribed by the law. 7

In the event of company liquidation the employer may not terminate employment contracts prior to the expiry of the two-month period that starts on the day of the termination notice given to the respective employee. Employees are entitled to severance pay of one average monthly payroll in the event of dismissal due to liquidation of the company. It is possible to terminate the employment contract prior to the expiry of the above two-month term subject to the respective employee s consent in writing and payment of additional severance pay that is the equivalent of the respective employee s average monthly payroll payable for the period remaining till expiry of this period. Notification to creditors The liquidation committee is under an obligation to notify in writing company liquidation to each company creditor and indicate the deadline for filing of financial claims by creditors. The liquidation committee should be able to demonstrate documents evidencing that a personal notice has been given to each creditor of the company liquidation and of the term available to the creditor for filing of a financial claim. Such evidence can include in particular copies of all notices given to creditors complete with documents confirming dispatch thereof (post office receipts, extracts from electronic message registers and logs, etc.). Inventory count The liquidation committee shall arrange for an inventory count of the company assets to determine the exact situation with assets and liabilities of the company in liquidation. Production and approval of an interim balance sheet The liquidation committee shall compile an interim liquidation balance sheet upon expiry of the term available to creditors for filing of their financial claims (which term cannot be less than two months). This interim liquidation balance sheet should reflect the structure of assets of the company in liquidation and list claims filed by creditors as well as the outcome of examination thereof. If the liquidation committee refuses to satisfy a filed creditor claim or avoids examination thereof, the creditor concerned is entitled to start a court action to enforce its claim on the liquidation committee however such an action may be started solely prior to the approval of the final liquidation balance sheet of the limited liability company in liquidation. If the 8

creditor does not start a court action after the refusal of the liquidation committee to satisfy his claim or if the court rejects the action, the claim is deemed to be cancelled. An interim liquidation balance is subject to approval by decision of the General Meeting of Shareholders of the company. This approval falls within the exclusive authority of the General Meeting of Shareholders and cannot be delegated to the board of directors (supervisory board) or the management of the company. Notification of the interim balance sheet to the registering authority The next step is notification of the approved interim balance sheet to the registering authority. The applicable law prescribes a certain approved form for this notice. Based on the above notice, the registering authority makes an entry to the Unified State Register of Legal Entities ( EGRUL ) regarding production of the interim liquidation balance sheet of the company. Satisfaction of creditor claims The liquidation commission should make payments to satisfy claims filed by creditors of the company in liquidation according to the claim priority determined by the Civil Code of the Russian Federation and based on the interim liquidation balance sheet, starting on the day of approval thereof, to exclude Category III and IV creditors that should be paid upon expiry of one month after approval of the interim liquidation balance sheet. Category I and II creditors have priority because payments to such creditors should be started promptly upon approval of the interim liquidation balance sheet. Creditor claims to a company in liquidation should be satisfied in the following order of priority: Category I: claims of individuals to whom the company in liquidation is liable for damage to life and health or in respect of moral damage reimbursement claims; Category II: severance pay and payroll payable to persons that are or have been working under employment contracts; fees payable under copyright agreements; Category III: mandatory charges payable to the state budget and to extra-budgetary funds; Category IV: other creditors. 9

Creditor claims in any category should be satisfied solely after all higher category claims are satisfied in full, excepting creditor claims in respect of liabilities secured by pledge of assets of the company in liquidation. If the company in liquidation does not have sufficient funds to satisfy all claims, the liquidation committee should sell company assets in an open outcry action and use the proceeds to satisfy creditor claims. If proceeds of sale of the company s assets do not suffice to satisfy all creditor claims, the company may be liquidated solely according to procedures prescribed by the Law on bankruptcy. Creditor claims are typically settled in cash. Distribution of remaining assets of the company in liquidation among its shareholders Only assets remaining after satisfaction of all creditor claims can be distributed among the shareholders of the company in liquidation. Distribution of remaining assets among the shareholders of the company in liquidation falls within the authority of the liquidation committee. The liquidation committee should distribute assets among the shareholders of a limited liability company in liquidation according to the following order of priority: First, the shareholders are paid dividends that have been accrued but not yet paid from profits; Second, the assets of the company in liquidation are distributed among the shareholders pro rata to their shareholdings in the share capital of the company. The liquidation committee should distribute assets among the shareholders of a joint stock company in liquidation according to the following order of priority: First, payments for shares that should be redeemed by the company on request of shareholders in compliance with the law on joint stock companies; Second, shareholders are paid dividends that have been accrued but not yet paid on preference shares and the liquidation value of preference shares established according to the Articles of Incorporation of the company; Third, the assets of the company in liquidation are distributed among holders of ordinary shares and preference shares of all types. 10

Production and approval of the liquidation balance sheet The liquidation balance sheet of the limited liability company is its final balance sheet that shows the balance of all accounts on completion of the company liquidation and of all creditor accounts. The liquidation committee should compile the liquidation balance sheet solely upon completion of settlements with creditors and inventory count of remaining assets. The liquidation balance sheet shows the structure of company assets remaining upon satisfaction of creditor claims. The liquidation balance sheet is subject to approval by the decision of the General meeting of shareholders of the company. Closing of bank accounts and transfer of company documents to the state archive The liquidation committee should close bank accounts of the company in liquidation and notify the relevant territorial offices of the tax authorities and extra-budgetary funds accordingly. Documents of the company in liquidation that are subject to permanent archive storage and that pertain to HR issues should be transferred to the state archive according to procedures prescribed by the law. The chairman of the liquidation committee or the receiver decides on the place of storage of the remaining documents. Notification of completed liquidation to the registering authority The liquidation committee notifies the completed liquidation to the relevant territorial office of the registering authority. The following documents should be filed for the purpose with the relevant territorial office of the registering authority: Application for registration of completed liquidation (to be filed on the approved form prescribed by the law). This application represents that the mandatory liquidation procedure prescribed by the law has been complied with, that settlements with company creditors have been completed and the liquidation has been duly coordinated with the relevant state and/or municipal authorities, if required by the applicable federal law; Liquidation balance sheet; 11

Evidence of payment of the required state duty; Evidence of filing with the relevant territorial office of the Russian Pension Fund of information required by the Federal Law On individualized (personalized) accounting in the mandatory pension insurance system and by the Federal Law On additional insurance premiums to cover the accumulating portion of the retirement pension and on state support to accumulation of the pension fund. If the company is liquidated according to the bankruptcy procedure, the decision of the relevant state arbitration court regarding the completion of the bankruptcy administration process should be filed with the registering authority. State registration of the company liquidation should be performed within five working days of filing of the required documents with the registering authority. The company is deemed to be liquidated in legal terms upon liquidation entry to the state register of legal entities. 12

Your Contacts Marina Yankovskaya Lawyer (Russia) Head of Practice Group Corporate Law and M&A Associate Partner Practise Areas: Corporate Law Purchase of companies M&A Banking Marina Yankovskaya advices primarily corporate entities in establishment, restructuring and liquidation in Russia. She regularly provides ongoing advice to companies regarding all aspects of the banking sector. Professional Experience: Deputy head of legal department of a Russian major bank Education: State University of Samara, Russia Academy of Economics of Samara, Russia Eastern Academy of Economics, Law and Humanities, Ufa, Russia University of Tübingen, Germany. Languages: Russian (mother tongue) German English 13

Dr. Artem Boyko, LL.M. Lawyer (Russia) Practice Areas: Corporate law M&A Contract law Dr. Artem Boyko provides legal advice and support to foreign corporations wishing to establish a subsidiary or enter into a joint venture within the Russian Federation. Experienced in carrying out legal due diligence of Russian companies. Professional Experience: Track record of employment with the Russian and German law firms Education: Rostov State University of Economics (Russia), School of Law, graduated with honors as a legal counsel Rostov State University of Economics (Russia), School of Finance, graduated as an economist University of Potsdam (Germany), School of Law, Magister Legum (LL.M.) (Summa Cum Laude) Belgorod State University (Russia), PhD. in Law Languages: Russian (mother tongue) German English 14

Dr. Andreas Knaul Attorney-at-law (Germany) Head of Branch Office, Partner Practice Areas: Corporate Law and purchase of companies Competition & Antitrust European and Public Business Law Dr. Andreas Knaul is familiar with business in Russia since 1993. He advices foreign and especially German medium-sized enterprises in entering into the Russian market and in conducting their business in Russia with a focus on international acquisitions. Professional Experience: Second state examination in 1990 Experienced in the Russian market since 1993 Broad background in European and International Economic Law Education: University of Trier, Germany University of Geneva, Switzerland University of Georgia, USA, LL.M. École Nationale d'administration, Paris, France, D.I.A.P. Languages: German (mother tongue) English Russian French 15

Rödl & Partner in Russia Russia s major business partners include Germany, Austria, Switzerland and other Western European countries. Multiple Western European companies are finding Russia s investment climate sufficiently good, notwithstanding the global financial crisis. Rödl & Partner services its clients from its Russian offices in Moscow, St. Petersburg, Sochi and Kaluga. Our staff includes above 200 highly skilled multilingual legal counsels, tax consultants, auditors and accountants. Our professionals work in teams and thus we are able to offer our clients comprehensive one-stop advice covering multiple aspects. We warrant our clients optimum support at the Russian market; this support is based on inter-disciplinary cooperation and knowledge of the Russian statutory requirements; furthermore it draws on the wealth of our experience worldwide and on the uniform corporate quality standards. We have gained firsthand knowledge of the local specifics and the experience of doing business in Russia owing to our many years of presence and active operations at the Russian market. Rödl & Partner is licensed to provide audit services to clients in Russia. Our employees are active as members of the Moscow City Bar, the Russian Bar, the Russian-German Chamber of Commerce (Deutsch-Russische Auslandshandelskammer, AHK), the Association of European Businesses, the Moscow Audit Chamber, the Chamber of Tax Consultants, the Chamber of Commerce and Industry of the Russian Federation and the German-Russian Forum (Deutsch-Russisches Forum E.V.). Our corporate web site www.roedl.com/ru features up-to-date information on diverse legal and tax issues in Russia.We offer our clients regular email newsletters and special coverages on the most recent tax and legal concerns in Russia in German, Russian and English. Please send an email to our account newsletter@roedl.ru if you want to be included in our mailing list. Jointly with various well-known organizations our firm participates in the development of business guides and especially of the Russia-devoted chapters. For example, in 2012 we contributed to Natural resources study, a publication of Germany Trade & Invest. Since 2010 we have been authors of the Russian part of the Outsourcing Guide, a publication of Practical Law Company (PLC), the leading provider of legal know-how, transactional analysis and market intelligence for lawyers. 16

About us Rödl & Partner is active at 91 wholly-owned locations in 40 countries. The integrated firm for audit, legal, management and tax consulting owes its dynamic success to over three thousand entrepreneurial minded partners and colleagues. In close collaboration with our clients we develop information for wellfounded economic, tax, legal and IT decisions that we implement together both nationally and internationally. The history of Rödl & Partner goes back to its foundation in 1977 in Nuremberg. Soon further offices were opened in Germany, central and eastern Europe (from 1989) and market entry to Asia (from 1995), followed by the development of important office locations in western and northern Europe (from 1998), in the US (from 2001), in South America (from 2005) and Africa (from 2008). Rather than create an artificial network of franchises or affiliates, we have chosen to set up international offices, and have created one global firm. We share a natural empathy with entrepreneurial, often family-owned, companies. They value personal service and like to have advisors close at hand. So Rödl & Partner has adopted a one face to the client approach a project manager works directly with our client, helping on all aspects of the matter in hand, and securing any further expertise the issue demands. It is an approach we have invested in conscientiously because we believe it is the best way to support international clients. The Rödl & Partner business philosophy is as distinctive as our approach to clients. Our clients problems do not fall into separate, neatly-labelled compartments. Our one-stop concept is based on a balance of expertise across a range of core professional areas, combining them seamlessly, and working in interdisciplinary teams. 17

What sets us Rödl & Partner is not a collection of accountants, auditors, lawyers, management and tax consultants working in parallel. We work together, closely interlinked across all service lines. We think from a market perspective, from a client s perspective, where a project team possesses all the capabilities to be successful and to realize the client s goals. Our interdisciplinary approach is not unique, nor is our global reach or our particularly strong presence among family businesses. It is the combination that cannot be found anywhere else a firm that is devoted to comprehensively supporting German businesses, wherever in the world they might be. 18

Offices in Russia Moscow Dr. Andreas Knaul Business Center LeFort Elektrozavodskaya 27, bld. 2 107023 Moscow Phone: + 7 (495) 933 51 20 Fax: + 7 (495) 933 51 21 E-mail: moskau@roedl.ru Kaluga Iurie Borşci Business Center Moskowskij ul. Suvorova 121, office 410 248001 Kaluga Phone: + 7 (930) 844 00 15 E-mail: kaluga@roedl.ru St. Petersburg Zurab Tsereteli 7/A, line 14th Vasilievskiy Ostrov 199034 St. Petersburg Phone: + 7 (812) 320 66 93 Fax: + 7 (812) 320 66 95 E-mail: stpetersburg@roedl.ru Sochi Iurie Borşci ul. Konstitutsii, 18 354000 Sochi Phone: + 7 (928) 233 51 07 E-mail: sochi@roedl.ru 19

Each and every person counts to the Castellers and to us. Human towers ( castells ) symbolize Rödl & Partner corporate culture in a unique way. They personify our philosophy of solidarity, balance, courage and team spirit. They stand for the growth that is based on own resources, the growth which has made Rödl & Partner the company we are today. Força, Equilibri, Valor i Seny (strength, equilibrium, valour and common sense) is the Catalan motto of all Castellers, describing their fundamental values very accurately. It is to our liking and also reflects our mentality. Therefore in May 2011 Rödl & Partner embarked on a collaborative journey with the representatives of this longstanding tradition of human towers Castellers de Barcelona. The Barcelonan association stands for this intangible cultural heritage among many other things. Business Center LeFort Elektrozavodskaya 27, bld. 2 107023 Moscow Phone: + 7 (495) 933 51 20 Fax: + 7 (495) 933 51 21 E-mail: moskau@roedl.ru www.roedl.com/ru