Thousands of company formations in Serbia are done every year, but a significant number of them are also dissolved through bankruptcy, liquidation, or status changes.1 Additionally, businesses can be exited through the sale of existing companies and the transfer of shares.
The liquidation process has often been used for various forms of abuse, leading to serious negative consequences for creditors and business security. Instead of engaging in a voluntary liquidation process, company owners have preferred to allow their company to undergo compulsory liquidation (or even deliberately instigate it), thus circumventing the rules designed to protect creditors and third parties in business transactions.
In response to these challenges, lawmakers have amended the law to prevent manipulation and protect creditors. This includes unlimited liability for controlling shareholders of a company undergoing compulsory liquidation for the obligations of the liquidated company, as well as the prohibition of controlling shareholders of a compulsory liquidated company with outstanding tax liabilities from founding a new company in Serbia. The amendments to the Corporate Income Tax Law also change the rules regarding the liability of the shareholders of a liquidated company for the company’s tax obligations. We explain this further below.
In Serbian law, the liquidation process is regulated by the Company Law (hereinafter referred to as the “Law”). Considering that the liquidation process is conducted before the Business Registers Agency (hereinafter referred to as the “BRA”), and that numerous accounting and tax issues arise during liquidation, it is necessary to be familiar with and apply various other legal and sub-legal regulations alongside the Law.
Types of Liquidation: When is Liquidation Voluntary and when is it Compulsory?
In Serbian law, there are two types of liquidation:
1. Voluntary Liquidation – This occurs when the shareholders of the company independently decide to cease operations and close the company.
2. Compulsory Liquidation – This occurs regardless of the will of the company’s shareholders and is initiated by the BRA for reasons explicitly specified by law.
Understanding the difference between these two types is crucial for properly managing the liquidation process and avoiding additional costs. Moreover, each type of liquidation carries different legal consequences.
Everything You Need to Know About Voluntary Liquidation
Voluntary liquidation begins on the day the Decision on liquidation is registered, which is made by the company with the appropriate majority of its shareholders’ votes, as well as the publication of the announcement regarding the initiation of liquidation.
The aforementioned announcement regarding the initiation of liquidation is published on the BRA’s website for a period of 90 days. The purpose of this announcement and its content is to invite the company’s creditors, who are winding up, to notify the company of any claims they have, so that the company can settle them in a timely manner and thus enable its removal from the registry. The deadline for creditors to submit their claims is 30 days from the expiration of the 90-day publication period (unless the company in liquidation changes its address during this time, in which case the deadlines start anew). In addition, the company has an obligation to individually notify certain creditors.
When the liquidation process begins, the company appoints a liquidator, who will handle all matters related to the liquidation, as well as the ongoing tasks that must be completed before the liquidation is finished. Once the liquidator is appointed, the right of other representatives of the company to act on its behalf is terminated. In practice, it can happen that the company does not appoint a liquidator, in which case all legal representatives of the company become liquidators and will represent the company together unless otherwise agreed. The liquidator is burdened with numerous duties during the liquidation process, including regular reporting to both the company’s shareholders and creditors about the state of the company’s assets, how much more time is needed to complete the liquidation process, what actions have been taken, and similar matters.
Given that successful liquidation requires preparing documentation in accordance with the regulations governing accounting and auditing, the role of the accountant is also of great importance. The accountant is responsible for preparing all extraordinary financial statements during the liquidation process, such as the Initial Liquidation Balance Sheet. The purpose of this statement is to show the financial position of the company undergoing liquidation. Essentially, it provides creditors with a clear picture of the possibility of settling their claims from the company’s assets.
During the liquidation process, one of the key issues is the proper handling of creditor claims. The company is obligated to record received claims in a separate list, classifying them as either acknowledged or disputed. If the company disputes a particular claim, it must notify the creditor, thereby allowing the creditor the opportunity to initiate a procedure before the competent court to verify the validity of the claim.
Since a company undergoing voluntary liquidation is solvent, meaning it is capable of covering all its obligations, it is often the case that after settling all creditors’ claims, there remains an excess of the company’s assets. This surplus is distributed to the company’s shareholders in accordance with the decision regarding the distribution of the liquidation surplus.
After settling all obligations, the company is ready to conclude the liquidation process.
What if the Company Does Not Have Sufficient Assets to Settle Creditor Claims?
During the liquidation process, it is crucial to pay attention to the company’s asset status and the ability to meet obligations to creditors. If the analysis of the initial liquidation balance sheet reveals insolvency, meaning the company’s assets are insufficient to cover all creditor claims, the question arises as to how to proceed with the process. In this case, the liquidator is required to submit a request to the competent court within the legally prescribed time frame to initiate bankruptcy proceedings.
Compulsory Liquidation: Reasons, Process, and Consequences
Compulsory liquidation is a process initiated by the BRA when a company fails to meet certain legal obligations or faces circumstances that prevent it from continuing operations. The purpose of initiating this process is to sanction non-compliance with the company’s legal status as per the law.
The reasons for initiating compulsory liquidation can be either removable or irremovable.
Removable reasons are those where the company can take the necessary actions within a certain period to correct the deficiencies.
For example, if a company loses its only legal representative and fails to register a new one or does not register a new address for its registered seat (if the application for the change of address has been rejected), it can rectify these deficiencies and avoid the initiation of compulsory liquidation. The law provides that in such cases, an announcement about the company in question is published on the business entity register’s website, after which the company is given an additional 90 days to correct the deficiencies.
After the 90-day period expires, and if the company has not rectified the reasons that would lead to compulsory liquidation, the BRA will, ex officio, issue an act to initiate the compulsory liquidation process, changing the company’s status to “in compulsory liquidation” (on the registry website), and this will last continuously for 60 days. After the expiration of this period, the BRA will, within an additional 30-day period, issue an act for the company’s removal from the register.
On the other hand, irremovable reasons are those where there is no legal or factual basis for their removal.
For example, if the company has been subjected to a measure prohibiting the conduct of business by a final act, if the nullity of the company’s registration has been determined by a final judgment, or if the company has failed to submit financial reports for two consecutive business years, such reasons inevitably lead to compulsory liquidation.
In the case of compulsory liquidation due to irremovable reasons, the BRA publishes a notice regarding the business entity for which the reasons for compulsory liquidation, which cannot be removed, have arisen. This notice is being published for a period of 30 days. After this period, as with compulsory liquidation due to removable reasons, BRA ex officio issues an act to initiate the compulsory liquidation process, and the company is given the status of “under compulsory liquidation” (on the register’s website) for a continuous period of 60 days. After the expiration of this period, APR deletes the company from the register within the next 30-day period.
The assets of the deleted company become the property of the shareholders of the company in proportion to their shares in the company’s capital.
Compulsory or Voluntary Liquidation – Which Option Is More Cost-Effective for a Company?
Based on the above, the question arises as to whether it is justified to voluntarily initiate the liquidation process and cover the inevitable costs associated with it, instead of deliberately failing to fulfill certain obligations that would lead to compulsory liquidation, allowing the BRA to efficiently and swiftly carry out the process.
Example: The company Most LLC deliberately fails to submit the annual financial statements within the statutory deadline, thus meeting an irremediable ground for initiating compulsory liquidation. As a result, BRA proceeds with the liquidation process and ultimately deletes the company from the register.
Due to the frequent occurrence of such and similar situations in practice, the legislator decided to intervene. Namely, the current law stipulates that in the case of compulsory liquidation, the controlling shareholder of a limited liability company and the controlling shareholder of a joint-stock company (i.e., shareholders holding more than 50% of the company’s share capital) are subject to unlimited joint and several liability for the company’s obligations, even after the company is deleted from the register. On the other hand, in the case of a voluntary liquidation process, shareholders are jointly and severally liable for the company’s obligations during liquidation and after its deletion from the register, but only up to the amount received from the liquidation surplus. In both cases, their liability is time-limited to three years from the date of the company’s deletion from BRA’s register.
Why Is Compulsory Liquidation a Bad Idea?
Compulsory liquidation of a company in Serbia can have significant consequences for the controlling shareholder, both in terms of liabilities towards creditors and future business activities in the country.
As mentioned in the previous section, the controlling shareholder of a limited liability company and the controlling shareholder of a joint-stock company deleted through compulsory liquidation are subject to unlimited liability (including their personal assets) for the company’s obligations even after its deletion from the register.
Beyond financial liability, the controlling shareholder may also face additional restrictions. According to current regulations, an individual who was a controlling shareholder of a company that was compulsorily deleted from the register while leaving outstanding tax obligations will be prevented from establishing a new company in Serbia that can legally operate. All outstanding tax liabilities remain indefinitely on the tax records of the debtor.
Initially, the controlling shareholder of the deleted company will not face any obstacles in registering a new company before BRA and commencing business operations. This is because BRA does not have direct access to tax liabilities. However, BRA is required to forward all data on the newly established company to the Tax Administration, which then initiates the process of revoking its Tax Identification Number (TIN). The loss of TIN means that the company cannot submit tax returns, issue invoices, or fiscal receipts. Moreover, the revocation of TIN leads to the blocking of the company’s bank accounts, effectively preventing the company from operating.
Thus, compulsory liquidation of a company with outstanding tax liabilities not only imposes a financial burden on the controlling shareholder but may also severely restrict their future business activities in the country.
Can Ongoing Liquidation Be Terminated?
Although liquidation is generally considered the final step in a company’s existence, there is a possibility of halting this process and allowing the company to continue operating. However, this option is only available under certain conditions.
The key requirement for terminating the liquidation process is that all creditors of the company must be fully satisfied, regardless of whether their claims were disputed or acknowledged. Additionally, one of the conditions is that the company must not have terminated the employment agreement of any employee on the grounds of liquidation.
For this reason, setting clear and precise goals, monitoring the financial situation, and preparing for all possible scenarios can significantly contribute to avoiding unpleasant situations that may arise during the liquidation process.
Tax Obligations of Company Shareholders After Liquidation – What You Need to Know
Considering that the National Assembly has adopted amendments to the Corporate Income Tax Law that are significant for taxpayers undergoing liquidation, which took effect on January 1, 2025, we will review some of these changes and their implications in practice.
A newly introduced provision stipulates that the shareholders of a company that has ceased to exist due to liquidation are jointly and severally liable for the payment of corporate income tax determined based on the tax return submitted after the liquidation process is completed. This liability is limited to the value of the assets individually received by the shareholders in the liquidation process.
By introducing this provision, it is established that company shareholders are jointly and severally liable only for the company’s tax obligation determined in the tax return filed upon the completion of the liquidation process. Accordingly, shareholders are not liable for all outstanding tax obligations of the liquidated company but only for the specific obligation determined in the respective tax return. Furthermore, their liability is limited to the value of the assets they individually received in the liquidation process (up to the amount of the liquidation surplus received).
The liquidation process, as one of the ways to terminate a company’s operations, requires thorough preparation and careful execution in compliance with legal regulations. During this process, it is crucial to meet statutory deadlines, properly notify creditors, address tax and accounting aspects, and complete all necessary steps in accordance with applicable regulations.
Consulting with lawyers and other experts will not only ensure compliance with legal requirements but also help minimize risks and costs associated with the process. If you are considering initiating a liquidation procedure or opting to sell your company instead, reach out to a team of professionals who will guide you through the entire process and ensure its successful completion.
