The existence of a legal entity can be compared with human life, i.e. establishment (birth), activities (human life) and liquidation (death). However, in each of the comparable phenomena above, from the point of view of law, there are significant differences. In the framework of this article, we focus on the consideration of the legal ‘death’ (liquidation) of legal entities, and study this issue in relation to certain types of corporations (business entities).
Business entities are the most common types of business corporations in Russia. Their legal forms - Joint-Stock Companies and Limited Liability Companies - make up the vast majority of legal entities registered in the Russian Federation. They bear hallmarks essential for potential investors, such as the limited liability of the members of a company for the debts of the company itself, the possibility for investors to run the corporation, and the possibility to receive part of the profit in the form of dividends.
In the framework of this article, I would like to make a point of such a right of members in a business entity as obtaining part of the assets of a liquidated corporation as part of a liquidation quota. The fact is that property benefits from the activities of a business entity are mainly received in the form of dividends on invested capital. This option is quite clear, and has been studied and regulated by both civil (corporate) law and tax regulations.
But there is another way to profit from the activities of a corporation. It can be applied in case of liquidation of a company, if after all necessary settlements with creditors, the liquidated company has some residual assets. This option is less common and studied, in connection with which we will try to fill the gap in the framework of this article.
To begin with, we consider it necessary to analyse the liquidation procedure itself, identify the characteristics of the creation and distribution of the property stock of the liquidated entity in order to understand the characteristics of the liquidation quota as the basis for the emergence of the rights of the liquidated corporation members to its assets. The definition of liquidation of a legal entity is given in clause 1 of Art. 61 of the Civil Code of the Russian Federation (hereinafter referred to as the Civil Code of the Russian Federation). In accordance with the above-mentioned provision, the liquidation of a legal entity entails its termination without transfer by way of universal succession of its rights and obligations to other persons. In analysing this provision, we can conclude that if a company is liquidated, then all of its rights and obligations, including proprietary interests in property, liability rights and exclusive rights to intellectual property are considered to have been lost. It is evident that this situation cannot meet the interests of both members in a legal entity and its creditors.  During liquidation, authorised persons (liquidation commission, liquidator) collect the property stock of the liquidated company, identify and collect receivables. These assets are used for settlements with creditors and making all mandatory payments. In the vast majority of cases, the property stock is sufficient to satisfy the claims of all creditors. The liquidated company draws up the final liquidation balance sheet and submits documents for state registration of the legal entity liquidation. In case of a favourable decision of the registering authority, the company ceases to exist and is excluded from the Unified State Register of Legal Entities (hereinafter referred to as the USRLE) due to voluntary liquidation.
It is worth noting once again that this option of closing a company involves a situation in which the debt of a liquidated company is equal to the value of its assets, which is extremely rare. In cases where the assets of the liquidated legal entity is insufficient to satisfy the demands of all creditors, it is possible to liquidate that company only in the manner prescribed by the bankruptcy law (paragraph 2 of clause 4 Article 63 of the Civil Code of the Russian Federation). We propose to consider the option in which the demands of all the creditors of the liquidated company are satisfied, and there are some residual assets. This situation is regulated by clause 8 of Art. 63 of the Civil Code of the Russian Federation. The specified provision states that the assets of a legal entity remaining after satisfying the claims of creditors are transferred to its founders (members) who have proprietary rights to the assets or corporate rights in relation to the legal entity, unless otherwise stipulated by law, other regulatory instruments or a constituent document of the legal entity. If there is a dispute between the founders (members) as to whom an item should be transferred to, it is sold by the liquidation commission at auction. We shall consider the sequence of division of assets during the liquidation of a limited liability company (hereinafter LLC) and a joint stock company (hereinafter JSC). In accordance with clause 1 of Art. 58 of the federal law dated 08 August 1998 N 14-FZ On Limited Liability Companies (hereinafter referred to as the Law on LLC), the residual assets of LLC after meeting the claims of creditors is transferred to its founders (members). The assets of the liquidated company are divided among the LLC members in the following priority order: - First of all, the distributed but unpaid part of the profit is paid to the company members (paragraph 2 of clause 1 of Art. 58 of the Law on LLC);
Secondly, the assets of the liquidated LLC between the company’s members are divided in proportion to their shares in the authorised capital of the company. The shares owned by the company are not taken into account in such a division of assets (clause 1 of Art. 24, paragraph three, paragraph of clause 1 of Art. 58 of the Law on LLC). In accordance with clause 2 of Art. 58 of the Law on LLC, the demands of each priority are satisfied after full satisfaction of the demands of the previous priority. If the company assets are not enough to pay the distributed but unpaid part of the profit, the assets of the company are divided among its members in proportion to their shares in the authorised capital of the company (Ruling of the North Caucasus District Arbitration Court dated 04 June 2015 No F08-2778/15) . As for joint-stock companies, it is regulated by Art. 23 of the federal law dated 26 December 1995 N 208-FZ (as amended on 27 December 2018) On Joint-Stock Companies (hereinafter the Law on JSC). The residual assets of the liquidated company after settlements with creditors are divided by the liquidation commission between the shareholders in the following priority order: - First of all, payments are made on shares, which shall be redeemed in accordance with Article 75 of the Law on JSC; - Secondly, payments of dividends accrued but not paid on preferred shares and the liquidation value on preferred shares determined by the company’s articles of association are made; - Thirdly, the assets of the liquidated company are divided between the shareholders, owners of ordinary shares and all types of preferred shares. The assets of each priority are divided after the complete division of assets of the previous priority. Payment by the company of the liquidation value determined by the articles of association of the company for preference shares of a certain type is made after the full payment of the liquidation value on preferred shares determined by the company’s articles of association of the previous priority.