Closing a business properly: who should get the property

After making settlements with creditors in the course of liquidation, a legal entity may have assets which need to be distributed among its members. Thus, often on the balance sheet of the company there is money, things (for example, laptops), intellectual property.

Distribution of the remaining property among the participants of the company is one of the final stages of liquidation, which in practice raises many questions. REVERA lawyers tell about basic rules of distribution of property among the participants upon liquidation and peculiarities which should be taken into consideration.

If there is only one member of the company, the property remaining after the settlement of the creditors is transferred to him or her. The issue is resolved differently if there are 2 or more participants, in which case the remaining property of the legal entity is distributed among the participants in accordance with the established rules of priority.

Priority of distribution of assets

For companies with two or more shareholders, the law establishes the sequence of distribution of assets, which differs depending on the legal form of the legal entity.

For example, shareholders’ claims in joint-stock companies (JSCs) are satisfied in the following order of priority:

• 1st priority – payments to owners of shares subject to redemption by the JSC (this priority arises only in cases when the JSC redeems its shares at the request of its shareholders, provided that the redemption process has not been completed and the payment itself has not taken place);
• 2nd priority – payments to owners of preferred shares, for which the dividends have been accrued but not paid out;
• 3rd priority – payment of fixed assets to holders of preferred shares or transfer of assets in kind;
• 4th priority – payments to holders of common shares.

The claims of the participants of a limited liability company (LLC) / additional liability company (ALC) shall be satisfied in the following order:

• 1st queue – payment to the participants of the distributed but unpaid part of the profit (this queue arises only if the decision on distribution of profit among the participants of LLC (ALC) was made, but the distribution itself did not take place);
• 2nd turn – distribution of the remaining property among the participants in proportion to their shares in the statutory fund.
   

Basic rules for the distribution of property balances:

• the claims of each subsequent queue are satisfied only after the claims of the previous queue have been satisfied in full;
   
• If the remaining property is insufficient to fully satisfy all claims of one queue, the property shall be distributed among the members of that queue in proportion to the member’s share;
  This rule cannot be changed either by the articles of association or by a decision of the general meeting of members and/or by a decision of the liquidator.
   
• if the share in the share capital belongs to the LLC (ALC) itself, the property attributable to this share is not distributed to it;
   
• The property to be distributed is transferred to the participants as it remains in the company after settlement with creditors.
  If a company has any equipment (e.g. a laptop), it is transferred to the members. This is due to the fact that the law does not expressly provide for the procedure of selling the remaining property at a public auction or disposing of it in any other way to settle with the participants. A public sale is only allowed if the company does not have enough money to satisfy the claims of creditors.

Rules for the transfer of certain types of property

It is also necessary to keep in mind that the legislation provides for a number of peculiarities for transfer of certain types of property, in particular this applies to service works.

An auxiliary work is a work of science, literature, art (its part that has an independent meaning) created by the author on the instructions of the employer or in performance of duties stipulated by the employment contract.

Thus, after liquidation of the hiring company, the exclusive rights to the service works are automatically transferred to the authors.

If the participant of the company is a non-resident of the Republic of Belarus or is located outside the Republic of Belarus, additional specifics may need to be taken into account when transferring the property, in particular:

• restrictions on the export of certain types of property from the Republic of Belarus (currently, a list of goods for which there is a temporary ban on export outside the Republic of Belarus has been approved);
• peculiarities established by the customs legislation.

Also one of the most important aspects to consider when distributing assets in liquidation is taxation, as the transfer of assets may result in the payment of taxes.

In particular, the participants may be liable to pay the following taxes:

• personal income tax;
   
• Income tax for Belarusian resident legal entities; Transfer of property, including cash, to a non-resident participant in liquidation is not subject to foreign corporate income tax.
   
• VAT;

When property is transferred in the form of cash, VAT does not arise either, as for VAT purposes money is not a commodity.

• Offshore duty arises when funds are transferred to a member of a company in liquidation that is located in an offshore zone.
   

This article deals with the procedure and specifics of settlements with participants in limited liability and additional liability companies and with shareholders in joint stock companies, as these forms of incorporation are the most common.

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