Is there a difference between commercial liquidation (CL) and commercial insolvency (CI)?

Let’s start by clarifying the difference between liquidation of companies and insolvency. Because those unfamiliar with the details of the Commercial Law often confuse the two terms. And there is a difference and it is significant.

In case of insolvency, compulsory proceedings are mandatory. While in liquidation the proceedings are voluntary and it is assumed that the debtor’s assets will be sufficient to pay off its creditors.

In CI, adversarial proceedings are conducted with broader court powers and the trader has limited opportunities to dispose of his property (and in some cases with completely suspended powers). This is not the case with CL, and the trader has the opportunity to dispose of his assets. There is also a certain possibility for the continuation of the activity of the Commercial Company (CC) and exit from the production. 

Liquidation of companies (LC) – meaning

When a company ceases its commercial activity and the legal entity (LE) disappears as a commercial subject, liquidation proceedings are initiated. As already mentioned, LC is a voluntary (security) production. The court does not direct the procedure and very rarely intervenes in it. The essence of this procedure is for CC to liquidate its property in order to be able to repay its debts to creditors. This is done in the interest of the shareholders (or partners). After payment with the creditors, the remaining asset is distributed among them. Liquidation is a universal remedy for all companies.

During liquidation, a liquidator (or liquidation commission) is appointed to replace the CC’s governing bodies. The liquidator runs the whole procedure for repayment of debts. He also takes care of receivables in pending cases (if have any). 

Main stages in Liquidation of companies

  1. Start

Termination of the activity of commercial company and appointment of a liquidator/s.

  1. Report on the situation at the time of termination of activity

A report on the assets of CC is prepared by the liquidator, which is presented to the management in the person of partners or shareholders. An accounting report is prepared at the end of the year.

  1. Essence

The main purpose of any liquidation is to satisfy the obligations to the creditors. This means the sale of the company’s property in order to raise the necessary funds. For this purpose, each creditor shall present its claims to the liquidators.

  1. The end

When the purpose of the liquidation is fulfilled, all debts to creditors are paid and receivables are collected – the final balance is created. The partners (or shareholders) distribute the rest of the property on this balance sheet. This occurs no earlier than 6 months after the creditors have received an invitation to claim their claims. The liquidator then sends an application to the court, deleting the LE from the Auction register. If the incorporation has been promulgated in the State Gazette, the liquidation of the CC is also subject to promulgation. 

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