If your company has undergone compulsory dissolution, there’s a simple recommendation as to what your next move should be: complete and file your annual reports.
Last year, an amendment to the Commercial Register Act was passed, which meant more fines for companies for the purpose of making the Estonian business environment more transparent. In fact, if a company is in repeated breach of the requirement of filing the annual report, the company may be deleted from the register without further ado. By now, accountants, auditors and credit institutions have accumulated their share of experience working under the new law.
Three experts in this field – Grant Thornton’s Head of Legal Advisory Kristel Tiits, Head of Tax Advisory Kristjan Järve and Head of Legal at LHV Daniel Haab – appeared on the Äripäev business daily’s radio programme Kasvukursil for a candid discussion about the problems that the new law has meant for companies who have failed to file an annual report due to objective reasons.
None of the guests would go so far as to say what the long term impact of forcible deletion would be for the business environment, but Järve said Estonia was unique in prescribing outright deletion of companies. In the rest of the world, it is a last resort and companies are otherwise usually fined. Tiits also noted that the state budget is cash-strapped, and instead this might be one possibility for filling coffers.
Daniel Haab from LHV Pank said they deal on a weekly basis with companies that underwent compulsory dissolution but they do not distinguish companies that were deleted specifically on the grounds of the new amendment. What happens if a company is deleted but funds remain on the account of the non-existent company?
“If there is no more company, the company cannot be represented by anyone and no one can authorise the bank to release the funds. We, too, do not wish to keep accounts with this type of assets open,” said Haab. Solution: reinstating the company.
Kristel Tiits says by way of reassurance that reinstating a company is not in itself complicated (it can only be somewhat time-consuming). The annual reports have to be filed after the fact and a court petitioned to reinstate the company. In this way, the company’s representative can access the assets from the bank and wind up other unfinished processes.
“But if there is no desire to continue the company’s activity after that point, then the company needs to be properly liquidated. The ‘decedent’ just needs to be ‘revived’ temporarily, as it were,” said Tiits.
Järve said that a majority of companies deleted compulsorily probably ‘deserve their fate’, in many cases, but if the company was actually a going concern and had employees, assets, partners and customers it unleashes a series of problems.
Tiits said that deleting a company is like a layoff, but if the company’s account has been closed, severance pay is not retrievable. “The employee’s continuous employment record is interrupted. Even if the company is reinstated and the employee re-hired, in the eyes of the law the employee has not been employed continuously,” said Tiits and added that it would be better to fine and not delete companies that are non-compliant with the new legislation.
Holding companies that manage investments on a day-to-day basis are a common phenomenon in the Estonian economy, said Haab. “Perhaps the state does not realise how important asset management is,” said Haab, and emphasised that compulsory dissolution of a holding company hamstrings all companies associated with it.
Tiits added that if companies have a holding in another business, it will also cripple the other business’s activity. “The worst is if the size of the holding is 50% – then not a single decision can be made,” she said. Although none of the guests said there had been problems of that nature, there is a potential risk.
Let’s say a company has been deleted from the register, assets are inaccessible, the employees are waiting to get paid, partners waiting for invoices to be paid. Järve recommends that representatives of deleted companies should not pay off such obligations out of pocket. “It opens a Pandora's box in the legal and taxation sense if an individual starts transferring money to the customers, suppliers and employees after compulsory dissolution,” cautioned Järve.
“If compulsory dissolution disaster has already occurred, it is recommended to quickly find some other company through which to make these payments, hire these people and get them accounted for,” recommended Järve.
An observation as regards the whole matter of the new legislation is that the state has unwittingly created a loophole for companies in difficulty to just get rid of the problem. “A diligent business operator has to conduct proceedings to liquidate their company, which takes 8-9 months to wind up everything properly. So in certain cases, scofflaws have an advantage here. Again, it’s unknown how this will impact the business environment,” said Tiits. Haab added that if a company has an outstanding loan and the company is compulsorily dissolved, the bank could end up holding the bag.
On the other hand, if a company has distributed assets properly, there are no outstanding obligations, it’s a win-win situation for the state to delete the company itself instead of a protracted liquidation process. “Even so, if some taxes are unpaid and the Tax Board has not conducted additional checks in this regard, it might become easier than it was before to abuse the new law,” said Järve.
24,600
24,600 companies have been compulsorily deleted this year (January to April).
1/50
Only 1 in 50 of the deleted companies is reinstated.
200
The state fee for reinstating a company is 200 euros.
Above all, explain the situation to the Commercial Register, ask for a new deadline, describe the company’s obligations to its employees, customers and partners. The guests confirmed that such matters require proceedings and deletion is not something that can be automated or computerised. If a company has already been deleted from the register, go ahead and file the outstanding annual reports. Reinstatement of a company is possible up to three years after deletion and the state fee is 200 euros.
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