Slimming down a company, corporate and financial restructuring will be on minds of many managers and company owners in the coming months.
In practice, when deciding to wind down a company, often a decision needs to be made whether to trigger a regular wind-down (likvidacija), a fast-track wind-down (prenehanje družbe po skrajšanem postopku) or a bankruptcy proceeding (stečaj). The main goal usually is to close down the company with less cost and no liability for the shareholder or the management.
1. What to address first
When taking this decision, the management and the shareholder first need to answer the following questions:
| Are there any compelling reasons to avoid bankruptcy? | - Reasons like effect on reputation; negative consequences for future access to the market segment or geography; timing (e.g. mid of an important transaction – bond issue); potential liability of the management or the shareholder to creditors might sway the decision away from a bankruptcy proceeding.
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| Is the company insolvent? | - If yes, regular wind-down is not possible. Therefore, unless the shareholders provide sufficient funds, thereby eliminating insolvency prior to start of a regular wind-down, the management has a duty to file for a bankruptcy proceeding.
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| What will be the cost of a wind-down? | - Regular wind-down is possible only if there are sufficient funds for settling all outstanding legal relationships (e.g. loans, employees, long-term agreements) and paying all financial obligations. This cost needs to be carefully assessed.
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| How can additional funds be provided? | |
| What is the value of assets? | - Value of the assets should be carefully assessed. Are the assets worth more or less than paid for? Are there any assets with hidden value?
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| How big are the current operations? | - Along with a regular wind-down, Slovenian law also provides an option of a fast-track wind-down. All legal relationships and all financial obligations need to be settled prior to winding-down the company. There is no formal proceeding. This process is very quick and easy and can usually be applied to companies with small (remaining) operations.
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| Are there any other options? | - Intra-group merger.
- Selling to another company
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After gathering the information above, the shareholder or the management should be able to make a preliminary assessment as to whether the company’s net worth is positive or negative and what is the best option on winding down the company. Assessment should be reviewed by the company’s accountant, financial advisors and lawyers in order to prepare a strategy on when and how to cease operations and plan the orderly liquidation of assets.
2. Overview of regular wind-down and bankruptcy proceeding
We prepared a short overview of the relevant steps in a regular wind-down and a bankruptcy proceeding that should help with the preliminary assessment of the activities, time and costs involved.
| | Regular wind-down proceeding | Bankruptcy proceeding |
| Who initiates the proceeding? | - Shareholder.
| - Company.
- Creditor.
- Personally liable shareholder.
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| What are the steps to kick-off the proceeding? | - Shareholder’s resolution on regular wind-down and appointment of liquidator.
- Required statements signed and verified at notary public by the liquidator.
- Entry of the shareholder's resolution in the commercial register.
- Registration of the start of the regular wind-down in the commercial register.
| - Filing of the request with the competent court.
- Decision of the court on the start of the proceeding and the appointment of the bankruptcy administrator.
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| Who has control? | Liquidator(s), who is (are) usually a member of the management board/director. | Bankruptcy administrator, appointed by a court. |
| When do creditors register their claims? | Deadline: at least 30 days after the invitation to creditors is published. | Deadline: 3 months after the court’s decisions on the start of the proceeding is published. |
| How does the liquidator / bankruptcy administrator start with their work? | - Inventory.
- Preparing the opening balance sheet.
- Preparing the plan for wind-down proceeding.
| - Inventory.
- Preparing the opening report and the opening balance sheet.
- Preparing the plan for bankruptcy proceeding (in 4 months after bankruptcy started).
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| How to wind-down the business? | Liquidator or bankruptcy administrator concludes all unfinished business, among others, terminates all existing contracts, dismisses the employees, pays the claims to creditors, recovers the claims of the company, concludes all litigation, sells the liquidation/bankruptcy estate needed to pay the creditors, etc. In bankruptcy, the administrator needs to follow strict rules on how to conduct the sale process. |
| How to dismiss employees? | - Regular wind-down is a business reason for termination of employment agreements.
- Liquidator terminates employment agreements.
- Short notice period: 30 days for all employees.
| - Start of the bankruptcy proceeding is a business reason for termination of employment agreements.
- Bankruptcy administrator terminates employment agreements.
- Very short notice period: 15 days for all employees.
- If the employees are not dismissed due to start of bankruptcy proceeding, notice periods based on regular termination due to business reason apply.
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| Employees are entitled to a statutory severance payment. The amount depends on the employee’s number of years with the company and its average monthly salary. |
| Protected categories of employees can be dismissed. |
| If the company has more than 20 employees, application of rules on collective redundancies will most likely have to be followed. Collective redundancy procedure includes preparing of collective redundancy program, notifications and consultations with trade union, employees’ representatives and the Employment Service of Slovenia. The individual dismissals due to wind-down or start of bankruptcy would last up to approximately 45 days (including service of termination notice), however the collective redundancies prolong the whole dismissal procedure for approximately 60 to 90 days. |
| How is the proceeding concluded? | - Liquidator prepares the report on the progress of the wind-down procedure with the proposal on distribution of assets.
- Shareholder confirms the report and proposal for distribution of assets with a resolution. Both documents are filed with the commercial register.
| When all assets are sold (or, if applicable, distributed to creditors) and the last payment of claims is done, the administrator prepares the closing report and the court then issues a resolution on conclusion of the proceeding. |
| When can remaining assets be distributed to the shareholder? | Only after 6 months (+30 days liquidator has to distribute the assets) from the publication of the shareholder’s resolution together with the invitation to creditors for registration of their claims on the website of the commercial register. | Only if all creditors are fully paid from the bankruptcy estate. |
| Taxes | Current tax on distribution of assets to a resident shareholder - legal entity: - the assets transferred or paid at the end of wind-down or bankruptcy are added to the taxable income of the company. The year-end taxable profit of the company is then taxed with 19% corporate income tax;
- certain assets, such as profit, profit carried forward, profit in reserves and profit converted to registered capital can be exempt from tax base (they will be effectively taxed only with 0.95% rate).
Current tax on distribution of assets to a resident shareholder – individual: - share held up to 5 years = 27.5%;
- share held between 5 to 10 years = 20%;
- share held between 10 to 15 years = 15%;
- share held between 15 to 20 years = 10%;
- share held more than 20 years = 0%.
Tax base is the value of the assets at distribution minus the value of assets at the time they were acquired (i.e. payment of the share). At both times 1% of deductible cost is recognized. |
| When is the company deleted from the commercial register? | After liquidator prepares a statement that all assets have been distributed in line with the shareholder’s resolution. The statement is filed with the commercial register together with the request to delete the company from the register. | When court’s resolution on conclusion of the bankruptcy proceeding becomes final. |
| Is the shareholder liable for creditor’s claims after the end of the proceeding? | No. |
| Duration of the proceeding | 7 months or longer depending on the size of the operations. | Usually from 1 year to several years, depending on the size of the operations and the sale of assets. |
3. Fast-track exit
For comparison with a regular wind-down proceeding, the fast-track wind-down proceeding is a simple close down of the company after all the outstanding legal relationships and financial obligations have already been settled without going into a formal proceeding.
When all is done, shareholder signs a notarised statement on (i) confirming that all the company's liabilities and all relations with the employees have been settled and (ii) accepting the liability of paying any potential outstanding liabilities of the company. The shareholder also adopts a resolution on winding-down the company in a fast-track proceeding with a proposal for distribution of assets and files for deletion of the company at the commercial register.
The shareholder remains liable for any claims of creditors for 2 years after the deletion of the company from the commercial register has been announced.
4. What else is important
When faced with winding down the business, the main goal is to do the process in an orderly manner by preserving the management’s and shareholder’s business reputation. It is important that all steps are done quickly to avoid losing time and increasing costs.
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