Judicial liquidation reasons include those determined by the court after the criminal or civil proceedings.
As part of the criminal procedure, a security or protective measure prohibiting the performance of activities can be imposed on the company. After its pronouncement, the company must change its activity or start a voluntary liquidation procedure. The compulsory liquidation procedure is initiated if the company does not do so.
The Law on the Liability of Legal Entities for Criminal Offenses also allows for imposing a penalty of termination of the company. After delivery of the decision, the company must initiate the voluntary liquidation procedure within 30 days; otherwise, the Serbian Business Registers Agency initiates the compulsory liquidation procedure.
There are three reasons for liquidation related to the court’s decision in civil proceedings:
- Established invalidity of the founding act
- Established invalidity of establishment registration
- Ordered the termination of the company following the Companies Act.
The first two procedures are initiated by filing a claim for declaration, where the court is asked to declare the invalidity of the founding act or the registration of the establishment. If the court approves the claim, i.e. cancel the foundation act or the registration of the establishment, the legal consequence of the obligation to start the compulsory liquidation procedure occurs.
The third judicial liquidation reason is “Dissolution of the company by a court decision”. The essence of the court proceedings is examining the justification for initiating liquidation proceedings.
Legal reasons do not necessarily lead to the company’s termination. Still, the court has discretion regarding the imposition of that consequence.
In Serbian law, termination of a company by a court decision is possible for any company stipulated in Articles 118, 138, 239 in connection with Article 469 of the Companies Act (“Official Gazette of RS”, no. 36/2011, 99/2011, 83/2014 – other laws, 5/2015, 44/2018, 95/2018, 91/2019 and 109/2021). However, the rules are different because there are two legal regimes, one that applies to companies of persons and the other to companies of capital.
The rules on terminating a company of persons are found in the partnership company and they are accordingly applied to limited partnerships, while the rules for capital companies are found in the section on joint stock companies, with a corresponding application to limited liability companies.
Right to initiate proceedings
Only its members have the right to initiate court proceedings for the termination of a company on this basis. When it comes to companies, the right to file a lawsuit is the individual right of each member.
In the case of capital companies, the right to start the procedure for the company’s termination on this basis is held by the members, that is, shareholders who represent at least 20% of the company’s basic capital. Members can join together to reach the legal quota. When determining the mentioned percentage in joint stock companies, ordinary and preferred shares holders are also considered.
Termination of the company and alternative measures
In civil proceedings, which are based on a lawsuit for the termination of a company, the judge has different options depending on whether it is a company of persons or companies of capital. In the case of a company of persons, there is no possibility of substituting the termination measure of a company of persons with another measure. Still, the judge can order the termination of the company of persons or reject the members’ claim. In the case of capital companies, the judge can, instead of terminating the company, impose one of five measures which the Companies Act establishes.
Deciding upon the action brought against the company members, i.e. company by the stockholders holding the stocks that represent a minimum of 20% of the company’s share capital, the competent court may impose the dissolution of a company or other measures if:
- The board of directors, i.e. executive board and supervisory board, if the company has a two-tier management system, are not able to manage the company’s operations, either due to mutual disagreement or for some other reasons, and the general meeting cannot break the deadlock, for which reason the company’s business may no longer be conducted in the interest of stockholders
- The stockholders are deadlocked in decision-making at the general meeting for a period that includes at least two consecutive sessions of the general meeting, for which reason the company’s business may no longer be conducted in the interest of the company
- acted unlawfully, dishonestly or fraudulently, which is contrary to the interest of the stockholders who are filing the action
- If the company’s assets are being dissipated or decreased.
In the proceeding upon the action, if the reasons why the action is filed are curable, the court may grant the company a deadline of a maximum of six months to eliminate the irregularities.
If the company fails to eliminate the irregularities within the judicial deadline, the court shall render a ruling to impose dissolution of the company or one or several alternative measures and may also order the company to compensate the damages of stockholders who filed the action.
The provisions of the Companies Act prescribe the following five alternative measures:
- Dismissal of a director or a member of the supervisory board, if the company has a two-tier management system
- Imposition of receivership on the company until the appointment of new directors, i.e. members of the supervisory board, if the company has a two-tier management system
- Conducting extraordinary audit of the company’s financial statements
- Rendering a decision on the distribution of profit or payment of shares in the profit, i.e. dividend
- Purchase of stocks owned by the stockholders who filed the action by the company at the value determined in accordance with the Article 475 of Companies Act.
The measures enumerated by the Companies Act are limiting. If the court decides not to order the company’s termination, it can only determine prescribed measures.
- Dismissal of a member of the management
The judge can dismiss any member of the management, i.e. the director or member of the supervisory board, if the company’s management is bicameral.
- Temporary compulsory administration
There are two preconditions for imposing this measure.
The first is the same for all measures, which is the fulfilment of one of the legally prescribed reasons for the company’s termination.
The second condition assumes that all or some positions on the board are vacant; that is, the company must have only some of the board members that it should have according to the law and internal acts. The judge can only appoint the missing members of the board.
The court’s appointment decision replaces the lacking decision of the company. As well as the company’s decision is the basis for the registration of management members in the register of business entities maintained by the Serbian Business Registers Agency.
- Extraordinary audit of financial statements
Implementing an extraordinary audit of financial statements is foreseen as one of the measures. An extraordinary audit means the revision of financial statements that have already been audited, and it is undertaken in two cases:
- if there is a suspicion that the audit of financial statements was not carried out following the law and accounting standards, and
- if the financial statements do not contain notes prescribed by accounting standards or need to be completed.
In addition to the conditions mentioned, fulfilling some legally prescribed reasons for termination is necessary to impose this measure.
- Decision on the distribution of profits
The judge can also pronounce the measure of making a decision on the distribution of profits or the payment of a share in profits, i.e. dividends. The judge’s decision replaces the decision of the competent body of the company. It has the same legal effect as if the decision was made by society.
If the judge decides to decide on the distribution of profits, it is necessary to fulfill all legal requirements. The only condition that does not have to be met is the decision of the competent body of the company because the court decision replaces the company’s decision. The judge can only make this decision if the company has funds that can be used for that purpose, as well as concerning the rules of the Institute of Limitation of Payments.
Any decision on the distribution of dividends, even the one made by a judge, must respect the different rights that holders of preferred shares have concerning the payment of dividends, then that within the same class, all shareholders have equal rights, as well as that the payment of dividends is realized in proportion to the amount paid, i.e. after entering the role.
Therefore, the court decision on the payment of dividends does not refer only to the member, that is, the shareholder who filed the lawsuit, but also to all other members, that is, shareholders.
- Redemption of shares (shares)
The last alternative measure, which the Companies Act prescribes is the redemption of shares (shares) owned by shareholders (members) who filed a lawsuit against the company. It has the following characteristics:
- First, the shares of only those shareholders who have filed a lawsuit for termination, regardless of whether they are holders of ordinary and/or preferred shares. If the judge decides on this measure, the shares of all those who filed the lawsuit will be repurchased.
- Second, this measure orders the company to buy back the plaintiffs’ shares. Therefore, the buyer of shares can only be a company.
- Third, the shares are repurchased at the value at which the shares of dissenting shareholders who exercise their right to exit the company are repurchased (Article 475 of the Companies Act). If the judge did not determine that value in the decision, the shareholder exercises his right to redemption in civil proceedings.