An alternative to liquidation – merger of a private limited company or a public limited company with assets of natural person.

Until 2015 there were two alternatives for the dissolution of a company: voluntary dissolution (liquidation) or compulsory dissolution. In this year termination of a company has become much easier and the law offers the third option – merger of a company’s assets with the assets of a natural person (acquiring natural person) who is the sole shareholder of the company. It is an alternative to the voluntary liquidation proceeding and it is the easiest option if the company is owned by one shareholder.

Conventional liquidation proceeding

The Commercial Code provides obligatory acts and deadlines. In practice the liquidation process from dissolution resolution to deletion of undertaking from commercial register takes on average eight months to a year or more. Often the company’s dissolution has been considered as a complicated, time-wasting and costly process that requires prepare additional documents and reports, especially in the so-called one-man firms.

Sometimes a shareholder a long abandoned the business and not interested in the continuation of the company expects a simpler and easier compulsory dissolution, where the court decides to deregister the company without liquidation.

Compulsory termination may occur for example, if a company intentionally does not submit an annual report, equity is not placed in line with requirements of law, the management board member's term of office expired more than two years ago, and a new management board has not been selected and the owners and management ignore of the registrar’s warnings. While this may seem like a lighter solution, the information about the compulsory dissolution is public and accessible in the commercial registry database for all interested parties.

In case of routine liquidation process the sole shareholder makes decision or signs the minutes of the meeting, which will denote the dissolution of the company, recalling of current members of the management board and the appointment of the liquidator, who will terminate the activities of the company, if necessary collect the debt, sell assets and satisfy the claims of creditors. At least one liquidator must have residence in Estonia.

For an entry about liquidation in the commercial register the decision with petition for entry shall be submitted to the registrar. The petition for entry may be certified by a notary as well signed digitally with ID-card in The Company Registration Portal.

After entering the liquidation into the register a notice regarding to the commencement of liquidation with an address to which the creditors have a right to file their claims within four months should be published in the portal Ametlikud Teadaanded (The Official Announcements). A notification in written form must be sent to the all known creditors. Liquidators shall satisfy the claims of creditors or deposit money regardless of whether the claim is made or not.

An adoption of the decision of the dissolution will complete the current fiscal year and start the new one. From the adoption of the decision of the dissolution to three months the liquidators prepare the liquidation opening balance sheet which will be sent to the shareholders for approval and shall be forwarded to the registry department.

After the company has been liquidated as required, the liquidators will have to submit an application to the Commercial Register for the deletion of the company from the Commercial Register. This can be done after a minimum of six months of the entry of the dissolution of the company into the Commercial Register and providing notification thereof.

A final balance sheet, asset distribution plan and the depositary of the documents will be added to the petition for deletion from the Commercial Register. The petition can be submitted by a notary or a digitally in Company Registration Portal. 

The assets must be distributed to shareholders by the nominal value of the shares otherwise there is no other agreed with decision or prescribed within statue of the company. It is also necessary to confirm that the final balance sheet and asset distribution plan have been not contested in court and the company is not a party of the any outgoing court proceedings.

A company shall not be deleted from the commercial register upon voluntary dissolution without the written consent of the Tax and Customs Board except if it has submitted a petition for deletion of the company from the commercial register. In order to obtain the consent, the registrar shall submit a written request to the Tax and Customs Board. If the consent is not received within ten working days after sending a request, the Tax and Customs Board shall be deemed to consent to deletion from the register.

Although the foregoing procedure requires the following specific deadlines, and the waiting period, a number of documents and audits if necessary, the normal liquidation is clear and final and the shareholders will not be liable with own assets in the future.

Termination of the company through merger with assets of natural person

A private limited company or public limited company may, as a company being acquired, merge with the assets of a natural person (acquiring natural person) who is the sole shareholder of the company. The provisions of this Code concerning an acquiring private limited company apply to the acquiring natural person, unless otherwise provided by law.

The merger is permitted also in case the shares are in the joint ownership of the spouses. The merger of a private limited company or public limited company with the assets of the company's shareholder who is a natural person is permitted also in case in addition to this shareholder the shares of a private limited company or public limited company being acquired are held exclusively by the company itself. A new type of merger can be applied then such ownership was reached before the merger proceedings, e.g. other shareholders have transferred their shares only to one shareholder. It is also allowed a number of the firm to merge at the same time, then there will be no need for several liquidation proceeding. 

The assets of a company being acquired, including its obligations, shall transfer to the acquiring company upon merger. In particular, the method is suitable for such a merger to companies which have ceased active operations, and with no debts and obligations. Acquiring company must not be bankrupt, and acquiring a natural person may not be insolvent.

Although that kind of merger is significantly faster compared with conventional liquidation, it is important to know that such a merger involves unlimited personal liability of a natural person for the obligations of the company being acquired.

It is also important to know that if the individual continues to operate the company received among the assets received, it will have to be registered as sole proprietor.

The main steps of the merger process:

• A private limited company or public limited company and sole shareholder will sign a certified by notary merger agreement with the terms of accession

• One month prior to the merger the company's management board will send to all known creditors written notice of the merger and shall publish a notice in the portal Ametlikud Teadaanded. A creditor has the right to demand a security for claims which arise before or within fifteen days after the publication of the notice in the official publication Ametlikud Teadaanded.

• If the share or shares of a company being acquired are in the joint ownership of the spouses and only one of the spouses entered into a merger agreement, the notarized consent of the other spouse for merger shall be enclosed to a petition for entry of the merger in the register.

• After one month a notarized application with final balance and other necessary documents will be submitted to the Commercial Register and the company will be deleted from the register.

Like the conventional liquidation the registrar must request the consent of the tax authority, which it has right to refuse in case of claims against acquiring natural person.

In practice, the merger process between natural person and her/his company takes far less than the conventional liquidation - about 2-4 months.

Detailed description of the merger is provided in the Commercial Code (CC) Chapter 31 Division 4’ (§ § 427¹-427⁵). In addition of CC the other laws were amended, including the Income Tax Act (ITA) § 50 (2) and (2²) and § 15 (3¹).

Till now ITA § 50 (2) says that a resident company shall pay income tax on the portion of payments made from the equity upon reduction of the share capital or contributions, upon redemption or return of shares or contributions (hereinafter holding) or in other cases, and on the portion of the paid liquidation distributions which exceed the monetary and non-monetary contributions paid into the equity of the company. Now section was amended by sentence which explains, that contributions made by one merged company to the equity of another merged company or made by a merged company to the equity of a company founded as a result of the merger shall not be taken into account as contributions made to the equity of an acquiring company or of a company founded as a result of the merger. Upon a division, contributions to the equity of a recipient company shall include contributions made to the equity of a company prior to the division on account of which no payments have been made from the equity or which have not been transferred to another company, and the corresponding share of contributions transferred to a recipient company by a company being divided.

ITA § 15 (3) is amended by adding clause (3²), which says, that income tax is charged upon merger of a company with the assets of a natural person on the difference between the revenue received from the company in monetary or non-monetary form and the taken over liabilities, which exceeds the acquisition cost of the holding unless income tax has been charged on the portion of the proceeds or the share of profit which is the basis of the proceeds. If a liability taken over from the company ceases to exist later due to waiver of a claim, limitation period, consolidation of an obligor and an obligee or other reason, income tax shall be charged on the amount of a liability which ceased to exist and by which the income received from the company upon merger was reduced.