Dissolving and liquidating a GmbH

Sale, closure or liquidation?

A shareholder may sell their stake in a GmbH if a purchaser is available and the articles of association and the rights of the other shareholders permit this. The transfer of GmbH shares must be notarised. The seller ceases to be a shareholder in the company. Contracts, employees, assets and liabilities remain with the GmbH. A sale therefore makes sense above all if the company – or at least the legal entity – still has economic value for a buyer.

Simply ceasing operations does not dissolve the company or terminate its obligations. Even without operational turnover, management, annual accounts, tax returns, disclosure requirements, the business address and register details must still be organised. Costs and liability risks continue to accrue. A ‘shelf company against one’s will’ may be a sensible option if business operations are to be resumed at a later date or if the legal entity is to be used for a new project. As a permanent solution for a GmbH that is no longer required, it is often uneconomical.

In the event of liquidation, the company’s assets are wound up. The company retains its legal capacity during this process, but its purpose changes: instead of developing new business, it must wind up ongoing affairs, realise receivables, settle debts and distribute any remaining assets. Only once this process has been completed does the company’s deregistration take place.

The transfer of individual assets to shareholders or another company may form part of the preparatory work. However, this must be carried out on reasonable terms, in a tax-compliant manner and whilst ensuring creditor protection and capital preservation. Assets must not be withdrawn in advance in order to ostensibly simplify the subsequent liquidation process.

The resolution to wind up the company initiates the liquidation process

In the event of voluntary dissolution, the company is dissolved by a resolution of the shareholders. Under section 60 of the German Limited Liability Companies Act (GmbHG), a three-quarters majority of the votes cast is generally required, unless the articles of association provide otherwise. The articles of association may provide for a higher or lower majority, specific conditions for approval, or a fixed end date.

The resolution should clearly specify the date of dissolution. It may also stipulate who is to act as liquidator, how the company is to be represented and what remuneration applies to the liquidation process. Often, the previous managing directors become liquidators. This is practical because they are familiar with the business, contracts and accounts. In the event of disputes, complex liability issues or a confusing financial situation, an independent person may be more suitable.

The winding-up and the liquidators must be registered with the commercial register. Section 65 of the German Limited Liability Companies Act (GmbHG) also requires the winding-up to be published and creditors to be invited to make themselves known to the company. Upon dissolution, the company’s name is supplemented with the words ‘in liquidation’ or ‘i. L.’. This suffix must appear on business letters, invoices and other business correspondence.

Dissolution does not terminate the duties of the governing bodies. The liquidators take the place of the managing directors for the purposes of winding up the company. They represent the company, keep the accounts and must continue to fulfil obligations under tax, commercial and insolvency law.

Duties of the liquidators

Under section 70 of the German Limited Liability Companies Act (GmbHG), the liquidators must wind up the day-to-day business, fulfil obligations, collect receivables and realise the assets into cash. New transactions may be entered into if they serve the purpose of the liquidation. A long-term restructuring of the business, on the other hand, would be incompatible with the purpose of the liquidation.

The first step is to carry out a thorough inventory. Bank accounts, trade receivables, stock, fixed assets, shareholdings, trademarks, domains and other rights must be recorded. On the liabilities side, accounts payable to suppliers, loans, taxes, staff entitlements, warranties, legal disputes and any contingent liabilities must be examined. Claims that are close to the limitation period or are disputed must also be included in the liquidation plan.

Ongoing contracts do not automatically terminate as a result of the winding-up. Rental, leasing, insurance, licence, maintenance and service contracts must be terminated, transferred or fulfilled in accordance with their respective terms. In the case of employees, the notice requirements, notice periods and, where applicable, participation rights under employment law apply. A winding-up under company law does not replace individual notices of termination or plans for the closure of business operations.

The liquidators draw up an opening balance sheet for the liquidation and continue to maintain the accounts throughout the liquidation process. If the liquidation extends over several financial years, annual accounts and disclosure requirements remain relevant. Tax returns and audits must be finalised by the end of the process. Early consultation with tax advisers and the accounts department prevents the company’s deregistration from subsequently failing due to outstanding tax assessments or missing documents.

Call for Creditors and the moratorium period

The notice to creditors is intended to give unknown creditors the opportunity to lodge their claims. It is published via the medium of publication prescribed by law. This publication is not merely a formality, as it marks the start of the moratorium year. Under Section 73 of the German Limited Liability Companies Act (GmbHG), assets may not be distributed to the shareholders until the company’s debts have been settled or secured and one year has elapsed since the call for creditors. The year does not commence from the date of the resolution to wind up the company. If the notice is published late or incorrectly, the date of the final distribution is postponed accordingly. The moratorium year does not mean that the liquidators must wait idly for twelve months. The actual winding-up process should be driven forward during this period. Claims are collected, contracts terminated, assets sold and known creditors satisfied. Security or an appropriate provision may be required for disputed claims or those not yet due.

Even after the year has elapsed, distributions may not be made if liabilities remain outstanding or are not adequately secured. The ‘lock-up year’ is therefore merely a minimum waiting period, not an automatic release mechanism. In the case of long-term warranties, tax audits or legal proceedings, the liquidation process may take considerably longer.

Distribution of assets and tax settlement

Only once creditors have been satisfied or secured and the blocking period has expired may any remaining assets be distributed to the shareholders. The distribution formula is generally based on shareholdings, unless the articles of association provide for different rights. Tangible assets may be transferred under certain conditions. However, it is often simpler and more transparent to realise them for cash.

A current liquidation statement should be available prior to the final distribution. In addition to known liabilities, it must also take into account liquidation costs, tax payments, storage costs and any potential subsequent liabilities. A payout made too early or in an excessive amount may give rise to claims for repayment and liability.

For tax purposes, liquidation is a separate process. Current profits, capital gains and the proceeds of liquidation must be classified at both the company and shareholder levels. The tax treatment depends, amongst other things, on whether shares are held as part of personal or business assets, who the shareholders are, and whether there are cross-border elements involved. Tax planning should begin before the sale of assets and distributions. In the case of a non-profit limited liability company (gGmbH), additional restrictions on the use of assets apply. According to the articles of association, the remaining assets must be used for tax-privileged purposes. Free distribution to the shareholders is not permitted. This difference should be taken into account when initially choosing between a gGmbH and a GmbH.

When insolvency law takes precedence

Voluntary liquidation requires that the company is able to meet its due obligations and finance the winding-up process. If it is insolvent or over-indebted, the liquidators, like the managing directors, must assess the obligation to file for insolvency. Under section 15a of the Insolvency Act (InsO), the application must be filed without culpable delay, no later than three weeks after the onset of insolvency and six weeks after the onset of over-indebtedness. These are maximum time limits, not discretionary waiting periods.

The resolution to wind up the company does not remove the obligation to file for insolvency. Nor may the ‘blocking year’ be used to wind up a company that is on the verge of insolvency outside of insolvency proceedings. Payments made after the company has become insolvent may give rise to personal liability. Furthermore, a delayed filing of the petition may constitute a criminal offence.

A liquidity statement should therefore be drawn up before liquidation begins. In doing so, all due liabilities, confirmed incoming payments and the costs of liquidation must be taken into account, in addition to current bank balances. If new losses, additional tax claims or litigation risks arise during liquidation, the assessment must be updated.

Filing for insolvency does not necessarily mean that an orderly solution is no longer possible. Depending on the situation, an insolvency plan, a restructuring involving the transfer of assets, or a discontinuation of proceedings following the satisfaction of creditors may be considered. However, voluntary liquidation must not replace this assessment.

Deregistration and supplementary liquidation

Once the liquidation has been completed, the liquidators draw up the final accounts and notify the commercial register of the conclusion of the liquidation. The Register will strike the company off if the statutory requirements have been met and no further winding-up activities are required. The books and records must then be retained for the applicable statutory retention periods. The person responsible for safekeeping them and the location where they are to be kept should be specified during the winding-up process.

If assets come to light after deregistration or if further liquidation measures are required, supplementary liquidation may be necessary. This may include, for example, a claim discovered at a later date, a tax refund, a forgotten asset or a registration procedure that has not yet been finalised. A thorough inventory prior to deregistration reduces this risk.

Occasionally, attempts are made to have a company struck off the register on the grounds of lack of assets without undergoing a proper liquidation. However, striking off under Section 394 of the Family Proceedings Act (FamFG) is a procedure conducted by the registry court and not a fast-track option that shareholders can freely choose. If there are still assets, outstanding claims, debts or winding-up measures in place, the company cannot be considered genuinely insolvent. A hasty application for deregistration does not relieve the company of its underlying obligations.

A well-structured project plan saves time and reduces liability risks

It makes sense to begin the liquidation process with a proposal for the shareholders’ approval. This should include an overview of assets and liabilities, the portfolio of contracts, personnel measures, tax status, estimated costs and the question of who is to manage the liquidation. On this basis, the resolution to wind up the company, the application to the register and the call to creditors can be coordinated without unnecessary delay.

The next step is to set out tasks, responsibilities and deadlines in a liquidation plan. Legal advisers, tax advisers, accountants and operational contacts should all be working from the same set of data. Of particular importance are a centralised list of contracts, a register of claims and an overview of potential cases of continued liability and warranty claims.

Preparations for the final phase should not be left until after the expiry of the restriction period. Final accounts, tax clearances, provisions, document retention and registry documents can be organised at an early stage. This ensures that the liquidation does not become a protracted process lasting years, left unresolved simply because of missing documents or unclear responsibilities.