Liquidator Risks & Tasks: Compliance and closure

In the business world, the termination of business activities is often an unavoidable step that companies may choose or be compelled to take. The reasons can be diverse, including a court decision following a dissolution lawsuit, the fulfillment of the company’s purpose, or simply financial difficulties. Just as there are certain obligations and processes at the beginning of business activities, there are also specific duties and procedures to be fulfilled at the end. As well as risks not to be underestimated.

This is where the liquidator comes into play, entrusted with the conclusion of business affairs and everything associated with it. The term „liquidation“ is derived from the Latin word „liquidare,“ meaning „to liquefy,“ and it describes the process of winding up business activities or dissolution.

In the liquidation process, the liquidator represents the company being dissolved in all steps related to the liquidation process. They „liquefy“ all company assets into liquid monetary values. Their responsibilities range from preparing a final balance sheet to issuing a call to creditors and distributing assets.

In our previous article „How to close a company in Germany,“ we already provided an overview of the liquidation procedure within a GmbH. Here, we take a closer look at the role of the liquidator and the steps involved in the dissolution of a company, where a liquidator provides significant support.

Who can become a liquidator?

In principle, both a legal entity and a natural person can be appointed as a liquidator. For a natural person, full legal capacity is required. Unless otherwise specified in the company’s articles of association (AOA), the managing director of a GmbH (limited liability company) is automatically appointed as the liquidator according to § 66 I GmbHG (the so-called „born liquidators“). This appointment as liquidator does not affect the managing director’s contract.

Additionally, third parties can also be appointed as liquidators, either through the company’s AOA or by a resolution of the shareholders‘ meeting.

What does a liquidator do?

I. Preparation of Financial Statements

The work of the liquidator begins even before the actual liquidation process. Initially, the liquidator must prepare the closing balance for the last fiscal year, according to §§ 242 ff., 264 ff. HGB, consisting of a balance sheet, profit and loss statement, and an appendix. The closing balance is part of the annual financial statement, providing a detailed summary of the financial situation and business results of a company.

Following the closing balance sheet, the liquidation opening balance sheet is prepared. This is a special balance sheet which is only required when a company is dissolved. It offers an overview of the existing assets in the company at the time of dissolution and aids in determining the subsequent distribution of these assets to the shareholders.

The winding-up of a company can often take several years. Therefore, it is necessary for the liquidators to prepare an interim financial statement of the liquidation and a management report at the end of each fiscal year.

II. Registration in the Commercial Register

According to § 78 GmbHG, the liquidators of a GmbH (limited liability company) are obliged to register the dissolution of the company at the Commercial Register, so the registry court at the place where the office of the GmbH is registered. This application requires notarial authentication, same as for the company’s formation.

III. Publication and Call to Creditors

Now, the actual liquidation begins. In the first step, the dissolution of the company must be announced in the „Gesellschaftsblatt,“ which is the Bundesanzeiger (Federal Gazette), according to § 65 II GmbHG. This announcement must include a call to creditors to submit their outstanding claims against the company. The publication initiates a one-year blocking period during which no company assets can be distributed to the shareholders.

IV. Termination of Ongoing Business and Settlement of Liabilities

The termination of ongoing business is not limited to individual transactions but encompasses the entire business activities of the company. This typically involves actions such as cancelling employment relationships and dissolving ongoing contractual obligations. If there are outstanding obligations within existing contracts, these can still be fulfilled. The liquidator may also permit new business activities if they are necessary for the dissolution of the GmbH.

In the next step, the liquidator collects claims / receivables and settles existing obligations of the company. The goal: distribute company assets to the shareholders. To identify creditors, the relevant company documents need to be evaluated. The order of settlement is then determined considering expiration dates and due dates. If it becomes evident that not all creditors can be satisfied, the liquidator must file for insolvency.

A reference to the liquidation process, such as „i.L.“ (in Liquidation), should be indicated, for example, on the company’s business letters.

V. Distribution of Company Assets to Shareholders

After preparing a liquidation closing balance sheet, consisting of annual financial statements and an appendix in which the liquidator outlines how the distribution of the remaining assets to the shareholders should occur, the distribution of the remaining assets to the shareholders takes place. The payout is done by the liquidator and is distributed proportionally based on the value of the shares held by each shareholder.

VI. Final Account

Following this, the liquidator is required to prepare a final account. This document provides an overview of the entire liquidation process, documenting the actual distribution of the final assets.

VII. Registration of the Liquidation Conclusion with the Commercial Register

Once all assets have been distributed, and no further winding-up measures are necessary, the liquidator registers the conclusion of the liquidation for the deletion of the company from the Commercial Register. Beforehand, it must be confirmed that the tax matters of the company are settled. With the conclusion of the liquidation, the liquidator declares the termination of the liquidator’s office.

What risks are there?

The liquidator bears the responsibility for a proper and regulation-compliant winding up of the company. In certain cases, they are personally liable for culpable conduct, meaning errors for which they are individually responsible. Personal liability is, for example, provided if the liquidator disregards the blocking period. They are responsible to the company for any resulting damage. Additionally, the Federal Court of Justice (BGH) has ruled that creditors can also hold the liquidator personally accountable for misconduct. It should be noted that such liability can have severe financial consequences for the liquidator.

If the liquidator determines the insolvency of the company during the liquidation process, they are obligated to file for insolvency. Associated tasks are subject to both civil and criminal liability. The law provides for a prison sentence of up to one year for the violation of the obligation to report losses.

How do we support you?

In summary, it is emphasized that company liquidation is an extensive process, which, depending on its complexity, can take several years. The attorneys and tax advisors at Ecovis Richard Hoffmann Rechtsanwaltskanzlei provide comprehensive support throughout the entire winding-up process, ensuring that the dissolution of the company complies with all legal requirements and potential pitfalls are avoided. Our experts also oversee the financial aspects of the process and prepare financial statements, liquidation balance sheets, and tax returns.