Liquidation proceedings in the case of a small corporation

Case Study 

In the case study outlined below, K GmbH operates an online food retail business. The financial year corresponds to the calendar year. Despite all the efforts, even after more than a year, it has not been possible to acquire enough customers and the sales figures have remained below expectations. The sole shareholder and managing director ‘S’ has therefore decided to liquidate the company. The requisite shareholder’s resolution is adopted on 28.2.2023. Notification of the dissolution is entered in the Commercial Register (Handelsregister) on 24.3.2023. 

In order to liquidate the company, the creditors are requested to contact K GmbH via an announcement in the Federal Gazette (Bundesanzeiger). After identifying and measuring all the assets and liabilities the call to creditors can be made on 26.4.2023. The liquidation is completed on 3.5.2024.

The liquidation process 

Dissolution 

Resolution on dissolution 

Dissolution denotes a process through which a company passes from having operational activities into the next phase, during which it winds up its affairs in order to terminate its existence.

While the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) provides many different reasons for dissolution, in the underlying case study the company was dissolved by a shareholder’s resolution brought about by S on 28.2.2023. Such a resolution requires a majority of three quarters, insofar as the company agreement does not contain any deviating provisions. This resolution does not result in any changes to the bylaws, with the advantage that neither a particular form nor a reason or justification are required. The resolution on dissolution brings about the dissolution of the company on a specified date, here it was 28.2.2023. 

Registration of the dissolution for entry in the Commercial Register 

The dissolution of the company moreover has to be registered in a notarially authenticated form for entry in the Commercial Register (Section 65 GmbHG). The company’s legal representatives (whether a liquidator or a managing director) are responsible for registering the dissolution. In the absence of a diverging shareholders’ resolution, as the managing director up to now, S automatically became the liquidator. This function is exercised until the deletion in the Commercial Register.

In the case in question, the notification of the changes was entered in the Commercial Register on 24.3.2023. Accordingly, the following changes can be seen in the extract from the Commercial Register: S is no longer the managing director, but instead the liquidator. In the extract from the Commercial Register it has been noted that the company has been dissolved. As of this date, K GmbH has to add ‘in Liquidation’ or ‘i.L.’ as a suffix to its name in business transactions. However, the submission to the Commercial Register merely has a declaratory effect and, therefore, has no influence on either the timing of the resolution on dissolution (28.2.2023) or on the call to creditors (26.4.2023) and the liquidation of the assets. 

Winding up 

First short financial year and opening liquidation balance sheet 

According to prevailing opinion, if a company is dissolved during the course of a year, then a new financial year will ‘automatically’ begin on the day of the dissolution without a resolution; in such a case the (first) short financial year will arise for the period prior to the dissolution. In the case in question, this runs from the start of the previous financial year up to the day that precedes the resolution on dissolution, thus from 1.1.2023 - 27.2.2023. Annual financial statements with a closing balance sheet have to be prepared for this short financial year to which the general provisions will apply. These final financial statements for the operating company (with a cut-off date of 27.2.2023) have to be published.

An opening liquidation balance sheet has to be prepared on the date on which the dissolution was approved (in this case: 28.2.2023) and this likewise has to be published. 

Announcement of the dissolution in the Federal Gazette

The aim of the call to creditors is to inform them about the dissolution. The creditors have to be requested to contact the company at the same as the announcement is made. The announcement of the dissolution is of particular importance because it is only once it is has been made that the blocking year commences (Section 73(1) GmbHG). This means that the assets may not be distributed to the shareholders prior to the expiry of one year from the day on which the creditors were requested, in the public papers, to contact the company.

In the case of K GmbH, the shareholder’s announcement appeared in the Federal Gazette on 26.4.2023. Consequently, the blocking year commenced from this date. This date is of no relevance for any accounts.

Final distribution and the blocking year

Any distribution of assets to shareholders is prohibited for the duration of the blocking year, i.e., until 26.4.2024. This means that only the claims of third-party creditors arising from third-party transactions may be settled. There is no ranking among the creditors. 

The amount and maturity of the liabilities are unaffected by the blocking year. In accordance with the general rules, the creditors’ claims continue to exist. The blocking year is not a preclusive period. Even after the blocking year has expired, it would still be possible to assert claims against the company. Although, the status of the claims will crucially depend on whether, during the blocking year, the respective creditor was known or had remained unknown.

After the blocking year has expired (i.e., from 27.4.2024), provided that company assets are still available, even previously unknown creditors may contact the company and try to satisfy their claims. However, if the assets have already been distributed then these creditors would get nothing. By contrast, known creditors will always have to be taken into account even after the blocking year has expired. If a known creditor does not get in touch, then the amount that is owed would, possibly, have to be deposited or a security provided (cf. Section 73(2) GmbHG). 

Second short financial year and closing liquidation balance sheet

After the first short financial year, a financial year commences that diverges from the calendar year. In the case in question, K GmbH’s new financial year runs from 28.2.2023 up to 27.2.2024, for which ‘normal’ annual financial statements will have to be prepared. This first set of financial statements in liquidation likewise will have to be published. 

A set of annual financial statements will once more have to be prepared for a second short financial year until the liquidation has finally been completed. The cut-off date for the end of this financial year will be the day on which the liquidation is completed. As mentioned at the beginning, the liquidation of K GmbH will be completed after the end of the blocking year by 3.5.2024. Consequently, there will be a closing short financial year from 28.2.2024 up to 3.5.2024. A closing liquidation balance sheet as at the reporting date of 3.5.2024 has to be prepared and published; this should show the final distribution of the company’s assets and liabilities following the completion of the liquidation.

In principle, for micro enterprises that are in liquidation the same rules apply as generally for micro corporations, which are exempt from preparing notes to the financial statements and a management report (Section 267a of the German Commercial Code). Consequently, for such companies the circumstances and the progress of the liquidation do not have to be described in the annual financial statements. 

Deletion 

The liquidation will be completed when no more winding-up measures are necessary. The completion of the winding-up proceedings is a condition for registering the deletion of the company in the Commercial Register and thus basically also the complete termination of the GmbH as a legal entity.  

According to Section 74(1) GmbHG, the company will be fully terminated once the completion of the liquidation and the deletion of the company have been entered in the Commercial Register. The completely terminated company thus ceases to exist.