Dealing with the property of a company that has ceased to exist
There are two legal ways in which a company can cease to exist without the participation of responsible persons in the company, when the law requirements are fulfilled. In view of this legal situation, there are many cases in practice of deleted companies with valuable property and the question is how to dispose of such property.
A company is being deleted in a shortened bankruptcy proceedings if the following assumptions are met:
- if the company has no employees,
- if the company’s accounts have been blocked due to the inability to charge the due enforcable claims for a continuous period of at least 120 days, and
- if the prerequisites for initiating another procedure of deleting the company from the court register are not fulfilled.
The second procedure in which a company can be deleted from the register is based on a final decision of the registration court ordering the deletion of the company ex officio:
- if the company has no property,
- if it did not comply with the compulsory legal regulations within the prescribed period, and
- if it has not submitted the annual financial report for three years in a row.
In the above-mentioned procedures, the decision on the conduction of the shortened bankruptcy procedure, meaning the decision on the deletion of the company ex officio, is not delivered to the company address, but is published on the official pages of the registration court and in the bankruptcy register, or on the website of the e-bulletin board. For this reason, generally, interested persons are aware of the deletion only when all legal deadlines for appeal have expired, for example at the moment when they wish to sell the company assets or otherwise dispose of them. At that point, the property was already without its holder because the company ceased to exist by being deleted from the court register.
If relatively short legal deadlines to challenge the deletion decision have expired, meaning the decision on the conduction of the shortened bankruptcy procedure, the members of the company have only to liquidate the property of the company. According to the existing legislative solution, it is not possible to obtain a re-registration of the company in the court register, it has already been expected that the property of the company should be monetized for the purpose of distribution to creditors and persons who held shares in the deleted company. This position has been confirmed by the High Commercial Court of the Republic of Croatia. Monetization of company property is associated with significant costs, above all the cost of litigation and tax costs regarding to the transfer of property.
Considering that members of the companies that are being deleted ex officio, have actually established those companies only to circumvent the legal obstacles applied to the acquisition of certain types of property (for example, real estate on agricultural land), it raises the question of whether the legislator actually disproportionately infringes on ownership and the right to a fair trial in relation to the holders of property rights in the company. Considering these are relatively new legal institutes, this issue has not yet been debated before the Constitutional Court of the Republic of Croatia, or before the European Court of Human Rights, however, such a turn of events is to be expected in the foreseeable future.
Depending on the procedure in which the company ceased to exist, the liquidation of the property of the company is carried out either in a liquidation procedure, on the basis of proposals by former members of the company for the appointment of a liquidator and for the liquidation of the deleted company’s property or in the bankruptcy procedure, based on the proposals of the former members of the company for subsequent division. In practice, it is more advantageous for persons who hold shares in the company to be subject to the classical liquidation on the company’s property, because in the bankruptcy proceedings of subsequent division, the company is represented by a bankruptcy commissioner chosen by the court at random, while in the liquidation proceedings any person who may be appointed as a member of a board can also be a liquidator. This person is appointed by members of the company. If the members of the company are forced to execute a bankruptcy proceeding of a subsequent division on the property of the company, they need to attain the status of majority or sole creditors of the company, in which way, although the company is still formally represented by the bankruptcy commissioner, in reality they get the opportunity to manage the bankruptcy proceedings, and if needed to appoint a new bankruptcy commissioner of their choice.
For tax reasons, it is necessary for members of the company to achieve recognition of all their claims against the company, not only in the bankruptcy proceedings, but also in the liquidation proceedings. Namely, the Law on Corporate Income Tax stipulates that the tax base on which the income tax is to be paid also includes the profit from liquidation , or bankruptcy proceedings, to which alternatively the provisions on liquidation apply. It follows that, if the monetization of the property would generate a surplus of income over expenses, the same would result in the tax base of the holder of the shares in the former company, on which there would be an obligation to pay income tax. This is a particularly problematic practical issue in cases where the company books are not properly kept and when the members of the company have invested in the property of the company as if it was their own, without protecting their stake in the manner prescribed by law.
In addition to corporate income tax, it is important to note that when the property of the company is being monetized, a tax obligation of the acquirer to pay property tax arises if it is prescribed (for example 4% of real estate value, special motor vehicle sales tax and so on), meaning the obligation of the bankruptcy estate to pay value added tax, if it is registered as a payer of value added tax, and for what reason it is advisable to avoid this entry if possible.
When members of a company transfer property of the company in their own name or to a newly formed company, all of these tax burdens are directly or indirectly charged to the holders of shares in the company. For this reason, it is crucial to develop a good business plan and examine all tax and legal aspects of future proceedings, before initiating them.