Voluntary liquidation of a company in Luxembourg

Liquidation operations step-by-step

The process for liquidating a company in Luxembourg is relatively simple to understand, however, the complexity of carrying out this procedure varies greatly. This generally depends on the size of the company as well as its multiple interactions and commitments with other stakeholders. The procedure to be carried out includes five steps which we will see below in detail:

Step 1: Establish a liquidation basis

The first step in proceeding with liquidation, before even making a decision on whether or not to liquidate the company, is to establish financial statements on a liquidation basis that will allow a sound and informed decision to be made.

A financial statement on a liquidation basis is a financial report prepared under the assumption that the company will cease operations and proceed to liquidate its assets. This type of statement realistically reflects the company's ability to meet its obligations and distribute residuals to shareholders in a closing context and usually includes the following elements:

• Complete inventory of the company's assets.
• Valuation of assets adjusted to the possible liquidation value (this is generally more conservative than the book value at fair value).
• Identification and quantification of outstanding debts and liabilities.
• Estimation of liquidation-related costs (liquidator's fees, legal, tax, etc.).
• Evaluation of the estimated remainder, if any, to be distributed to the shareholders after fulfilling the obligations.

This accounting situation will serve as a basis of information for the partners or shareholders and the liquidator to evaluate the convenience and possibility of proceeding with a liquidation.

Step 2: Convene an extraordinary general meeting to decide on the liquidation

The next step to follow once there is an accounting basis for liquidation on which to make decisions is the convening by the managers or the members of the Board of Directors of an extraordinary General Meeting to decide whether or not to proceed with the liquidation of the company. This general meeting must be held before a notary.

For a decision on the liquidation of the company to be valid, there is a minimum amount of the company's capital that must be represented and a minimum number of votes, both values depending on the structure of the company. The following are the standard minimum values, however, the articles of association may establish more restrictive conditions.

• For SA and SCA: at least half of the capital stock and 2/3 of the votes must be represented.
• For SARLs, SENCs and SCSs: in the liquidation of a Luxembourg SARL, a SENC or an SCS, half of the shareholders representing 3/4 of the share capital must approve the decision.

If the liquidation of the company is approved, the general meeting must appoint one or more liquidators and determine the method of liquidation. Although the current administrators of the company are often chosen, a qualified third party such as a lawyer, accountant or a company specialized in liquidations may also be appointed.

The decision to appoint an external liquidator will depend on multiple factors related to the company's situation such as the complexity of the liquidation process and the confidence in the abilities of the existing directors.

It is common to appoint existing directors as liquidators when the company has a simple structure and few assets or debts, the shareholders have full confidence in their ability to manage the process, there are no significant internal or external conflicts, and the costs associated with an external liquidator are not justified in relation to the size of the liquidation. In contrast, it is common and advisable to appoint external liquidators in the following cases:

• The liquidation involves conflicts between shareholders where a neutral third party is needed to mediate and make decisions.
• The company has significant assets or complex contractual relationships that require specialized expertise.
• There are concerns about the transparency or competence of the current administrators to manage the liquidation.
• Significant creditors request additional oversight to ensure compliance with obligations.

Step 3 - Proceed with the necessary operations for liquidation

Once the liquidator has been appointed, whether it is the company's manager or an external person, he must begin the liquidation process. This process includes, broadly speaking, four main stages:

• Declaration of activity termination to all official bodies. One of the first actions to be carried out by the liquidator is to declare the cessation of the activity to the different official bodies in order to cancel the different existing authorizations or registrations. The following is a list of the main entities that must be notified: Registry of Commerce and Companies ( RCS): the RCS must be informed in order for the liquidation to have legal effects against third parties. Luxembourg Inland Revenue: the liquidator must inform the tax authority of the dissolution of the company and manage the fulfillment of outstanding tax obligations, including the filing of returns and payment of taxes due. Registration Duties, Estates and VAT Authority (AED): it is necessary to notify this entity for all matters related to Value Added Tax (VAT) and other registration duties. Social Security Center (CCSS): if the company has employees the liquidator must inform the CCSS and manage outstanding social contributions. Labor and Mines Inspectorate (ITM): closing a company implies complying with strict legal requirements related to the termination of labor contracts. It is essential to notify the ITM as it must supervise these processes to ensure that the rules regarding notice, severance and other employee rights are followed. Financial Sector Supervisory Commission (CSSF): if the company operates in the financial sector or is subject to financial regulation the liquidator must notify the CSSF of its dissolution. Local Municipality: it is advisable to inform the relevant municipality about the cessation of activities, especially if the company holds municipal licenses or permits. Directorate-General for SMEs, Crafts and Trade: this department of the Ministry of Economy is responsible for the management of establishment authorizations. The liquidator must notify this directorate about the dissolution of the company and the cessation of activities so that the records are updated and the corresponding authorization is cancelled.
• Recovery and realization of assets. The next step consists of recovering the sums owed to the company and selling the assets belonging to the company in order to then be able to pay all the company's debts and distribute the remaining profits among the shareholders. However, it should be noted that it is not necessary to sell all the assets, if it is possible to pay all the debts without selling all the assets, the remaining assets can be distributed among the shareholders or partners in proportion to their rights in the capital of the company. It is also important to note that the liquidator may act against the partners to demand the payment of sums that they have undertaken to pay into the company or that he considers necessary to liquidate the company. For example, when incorporating corporations, the partners may be limited to pay up to 1/4 of the subscribed capital stock. The liquidator may act against the partners to demand the payment of the subscribed contributions and to obtain payment of the remaining three quarters that have not yet been paid up on the day of the liquidation of the company.
• Distribution of assets. In addition to recovering the assets, the liquidator must also distribute these same assets among the various creditors. The assets must be distributed in proportion to the amount of each debt and must ensure equality among the creditors, although the liquidator must respect the preferential nature of certain creditors. Before any distribution to other creditors, the following debts must be paid in the established order: Legal expenses. Wages and indemnities owed by the company. Debts owed to public administrations. Debts with mortgage guarantee. All other secured claims. If the assets are insufficient to meet all debts the liquidator must file for bankruptcy on behalf of the company. Conversely, if after all amounts due to creditors have been paid or deposited there are remaining assets, the liquidator may distribute them to the shareholders.
• Preparation of the liquidation report. Once the liquidation has been concluded and before proceeding to close, the liquidator must establish the liquidation accounts and make a liquidation report. However, if the liquidation lasts more than one year, every year the liquidator must draw up an annual report stating the reasons that have prevented the liquidation from being completed, present the results of the liquidation to the general meeting and, in the case of a public limited company, have the annual accounts published.

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Step 4 - Convene a second general meeting to approve the liquidation report

Once the liquidator has finished preparing the final liquidation report, a second general meeting must be called to approve the accounts and the liquidation report.

At this meeting, the shareholders or associates must read the liquidation report and appoint one or more auditors to verify the accuracy of the liquidation report and the accounts prepared by the liquidator. In addition, large public limited companies and limited liability companies with more than 25 shareholders must use the services of a statutory auditor. His role is to examine whether the liquidation accounts and the liquidator's report are consistent with the company's documents and the measures taken by the liquidator.

Finally, the date of a third and final general meeting must be set, in order to review the statutory auditor's report and declare the liquidation closed.

Step 5 - Convene a final general meeting and conclude the liquidation proceedings

At the last general meeting, which does not necessarily have to be held before a notary, the shareholders or associates must approve the liquidation accounts and the auditor's accounts, approve the liquidator's management, decide where the company's books and documents will be kept as these must be kept for 5 years and decide on the distribution of any liquidation surplus.

After this, the liquidator may publish the closing of the liquidation in the commercial register and proceed, if the situation allows it, to the reimbursement of the capital and the payment of the liquidation surplus.