Vol 1 (2004) - Issue 3

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The Closing Down of Danish Business Activities

Introduction

In the previous issue the restructuring of Danish business activities by way of a business transfer was discussed, and the focus was on the possibility of the shareholders or managers maintaining the operation by transfer to an ‘acquiring vehicle’, leaving the debtor company to be dissolved.
In this issue we will focus on the closing-down procedure in relation to Danish companies. For this purpose we will again be looking solely at private limited companies and public limited companies. A closing-down of the subsidiary company may be relevant if the parent company decides to shut down its subsidiary activities entirely or after a transfer of the subsidiary’s operation as described above. In both cases the subsidiary company may be insolvent or not.
The liquidation procedures regarding private limited companies and public limited companies are provided for in the Danish Private Companies Act and the Danish Public Companies Act, respectively, and are almost identical. However, these procedures only apply when the company is solvent. In the event that the company is insolvent the person appointed as liquidator must file a bankruptcy petition with the local bankruptcy court.
In the event that the company is insolvent, the usual dissolution procedure is bankruptcy based on a bankruptcy petition filed by a creditor or the company itself. The bankruptcy is administrated by a trustee appointed by the bankruptcy court and the assets are distributed to the creditors in accordance with the order of priority of creditors.
Often foreign companies which have organized their Danish business activities through incorporation of fully-owned subsidiaries have financed the operations on a continuing basis and in this way the parent company will often turn out to be the largest or even the sole creditor of the subsidiary. Thus, apart from the parent company, the company to be dissolved may have no creditors. Even so, the company may be insolvent due to the fact that it did not succeed in its operations and no assets are left. In this event, the parent company may find it inadequate that its subsidiary is declared bankrupt as the reputation, name, etc. of the parent company may be at stake.
In the following we will look at the closing-down procedures available for the bankruptcy courts and the parent company in order to dissolve the insolvent and the solvent subsidiary company in an adequate manner.

a. Voluntary liquidation

The voluntary liquidation regime applies to companies with limited liability and the rules pertaining to the voluntary liquidation of private and public limited companies are laid down in the Private Limited Companies Act and the Public Limited Companies Act, respectively. To initiate a voluntary liquidation the company must be able to settle all debts, including taxes and the liquidation costs. If the assets of the company are not sufficient, the only possible way to close down the company is by insolvency procedures, typically bankruptcy proceedings.
A shareholder may wish to close down an insolvent company by a voluntary liquidation in order to avoid bankruptcy proceedings that will be out of the control of the shareholder and which may adversely affect a business in which the shareholder may otherwise be engaged. In this case the shareholder may infuse the necessary liquid funds into the company or pay the creditors without claiming the right of recourse against the debtor company. A shareholder may also cancel a debt payable by the subsidiary. As these transactions may be taxable, the procedure should be carefully considered beforehand.
According to the aforementioned rules, the shareholders of a company can adopt a decision to liquidate the company at a general meeting. In certain cases the liquidation of a company may be mandatory according to the articles of association or a shareholders agreement. However, from a legal point of view the proceedings to be initiated fall within the voluntary liquidation regime. The shareholders must appoint a liquidator.
By the shareholders’ appointment of a liquidator, the liquidator replaces the management and the board of directors, who retire. However, the power of the general meeting and the shareholders is unlimited and the shareholders may decide to appoint a new liquidator or to suspend the liquidation.