Vol 1 (2004) - Issue 6

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Solvent Liquidations in Germany

Introduction

Our recent consulting projects have shown that many foreign investors, mainly from the UK and the US, are reconsidering their investments in German subsidiary companies. This regrettable development is due to the current economic situation in Germany. The striking fact is that Germany’s economic performance in the 1990s and at the beginning of the 21st century was outstandingly poor: within this period, real gross domestic product (GDP) growth remained on a meagre level, job losses amounted to roughly 5% of the labor force, the unemployment rate nearly doubled and Germany overshot the EU standards in terms of keeping its budget deficit below 3% of economic output. Furthermore Germany faces huge challenges regarding its upcoming social and economic reform policy. These business conditions, together with bad performance of German subsidiary companies, led to the result that foreign investors are averse to continuing business in Germany and would rather give up their companies.
Because of this, the following explanations summarize the main legal actions required when liquidating a company on a voluntary (solvent) basis. Note that the overview deals with the liquidation of a German limited partnership (‘GmbH’) as the most common legal form in Germany.

Official procedure concerning voluntary liquidation

A limited partnership (‘GmbH’) can be dissolved by a voluntary order of its partners. To fulfill the requirements of the official procedure (see sections 60-77 GmbHG ‘German Law pertaining to Companies with limited liability’), some points have to be noted.

Initiation of voluntary liquidation

The dissolution of the GmbH has to be filed for registration in the Commercial Register by the liquidator of the GmbH. The liquidator is generally the Managing Director (see section 66 GmbHG) who automatically becomes liquidator upon dissolution of the company unless other individuals are appointed by shareholders’ resolution.
During the liquidation procedure, the liquidator assumes the function the Managing Director(s) held in the course of a normal life of the company, i.e. he is its legal representative during this stage. He shall terminate current transactions, fulfill the outstanding obligations and may also enter into new obligations for the purpose of the liquidation only. During the liquidation process of the company, the conduct of further or new transactions is permitted provided the business transactions serve the objects of the liquidation.
One of the main functions of the liquidator is the settlement of liabilities to the creditors of the company. To this end, the company’s assets might be sold or distributed to discharge the liabilities towards third parties.
In addition to the obligation to file for registration of the dissolution of the company with the Commercial Register, the company’s creditors have to be given proper notice of the liquidation. Therefore, the liquidator has to publish in three consecutive issues of the German Federal Gazette(‘Bundesanzeiger’) the dissolution of the company and the request to all creditors of the company to assert their claims. Note that upon the third publication of the dissolution of the company in the German Federal Gazette the so-called restrictive year (‘Sperrjahr’) starts. This means that the distribution of the remaining assets to the shareholders may not occur prior to the expiry of this restrictive year following the third publication in the German Federal Gazette. Once the dissolution has been adopted, the company must clearly identify itself as being in liquidation. In particular, this includes changing of the company’s name by adding the letters ‘i.L.’ (‘in liquidation’). In principal, the company in liquidation continues to be governed by the same rules which apply to an on-going enterprise.

Opening liquidation balance sheet

The liquidator must prepare an opening liquidation balance sheet (‘Liquidationseröffnungsbilanz’) as of the date of the dissolution of the company, and regular financial statements on an annual basis thereafter.