Assets in liquidation are not free prey

Liquidation of a company is a formal process of dissolution of a business entity in the Czech Republic. Many people mistakenly believe that the liquidator is free to dispose of the assets of a company that has entered liquidation or that he has unlimited power over them. However, it is important to note that the activities of a liquidator are strictly regulated by statutory provisions aimed at protecting the interests of all parties involved. It is essential for potential clients, whether they are business owners, creditors or debtors, to understand these restrictions so that they can effectively defend their rights and protect their financial interests.

Author of article: ARROWS (Mgr. Jan Pavlík, office@arws.cz, +420 245 007 740)

Who is the liquidator and what are his powers and duties?

A liquidator is a natural or legal person appointed to manage the liquidation process of a company. Once appointed, the liquidator assumes the powers of the company's statutory body and acts on its behalf, but solely for the purpose of carrying out the liquidation. The key duties of the liquidator include proposing the entry of the company into liquidation in the public register without undue delay. He is also required to administer the company's assets and liabilities, prepare an opening balance sheet and an inventory of assets. It is equally important to inform all known creditors of the company's entry into liquidation and invite them to register their claims. The liquidator must use the funds obtained from the sale of the company's assets to satisfy the claims of creditors in the order provided for by law. In the event that any assets (liquidation balance) remain after the satisfaction of all claims, the liquidator is obliged to distribute them among the entitled persons. Last but not least, the liquidator ensures all necessary administrative acts and documents for the deletion of the company from the Commercial Register.

Although the liquidator has considerable powers, these powers are strictly limited by the purpose of the liquidation. This fundamental limitation is key to understanding what constitutes an excess of his powers.

Summary of key duties and responsibilities of a liquidator in the Czech Republic

Obligation/Responsibility	Brief description
Proposal to register the commencement of liquidation in the public register	Ensures that it is officially recorded that the company is in liquidation.
Management of company assets and liabilities	It includes taking care of the company's assets and liabilities during the liquidation process.
Preparation of opening balance sheet and inventory of assets	It will provide an overview of the financial position of the company at the beginning of the liquidation.
Notification of entry into liquidation to known creditors and invitation to submit claims	It informs creditors of the liquidation and sets a deadline for the exercise of their claims.
Monetization of company assets	Sale of company assets to raise funds.
Satisfaction of creditors' claims in the statutory order	Payment of amounts owed to creditors according to predetermined priority rules.
Distribution of the liquidation balance	If there are assets remaining after all claims have been satisfied, they are divided between the beneficiaries.
Providing documents for the deletion of the company from the Commercial Register	Completion of all documentation and fulfillment of administrative requirements for the formal dissolution of the company.

Beyond the law: specific cases of liquidators' excesses

The law sets clear boundaries for the activities of a liquidator. There are a number of specific acts that a liquidator must not commit which constitute exceeding his powers:

• Misappropriation of assets: the liquidator must not use the company's assets for his personal benefit or for purposes unrelated to the liquidation. Similarly, it is prohibited to sell assets below market value without proper justification and transparency, which could harm creditors or shareholders. Hiding or destroying assets that should be part of the liquidation estate is also not allowed.
• Conflicts of interest: The liquidator should avoid situations where his personal interests conflict with the interests of the liquidated company and its creditors. This includes dealing with related parties (e.g. family members, other companies in which he has an interest) without proper notification and approval, and on terms that could be disadvantageous to the liquidated company. Favouring certain creditors or interested parties without a legitimate legal reason is also prohibited.
• Delays and inaction: The liquidator must not unduly prolong the liquidation process, which would lead to unnecessary costs and uncertainty for the parties involved. He must also actively seek, secure and monetise the company's assets within a reasonable time.
• Breach of the duty to act with due care: The law requires a liquidator to exercise his or her functions with professional care and diligence, similar to a member of the statutory body. Ignoring legitimate claims or inquiries from creditors or debtors, or failing to act on matters that require his or her attention, constitutes a breach of this duty.
• Exceeding statutory authority: the liquidator may only take acts which are directed towards the liquidation of the company. The commencement of new business activities on behalf of a company in liquidation or other activities not necessary for the winding up of the company are prohibited.

Common types of excesses of liquidators and their potential impact

Type of excess	Example	Potential impact
Unauthorised disposal of property	The liquidator sells the company's real estate to a friend for significantly less than the market value.	Reduction of funds to satisfy creditors, loss to shareholders.
Conflict of interest	The liquidator enters into a service contract with a company owned by his wife at an unreasonably high price.	Drainage of assets from the liquidation estate in favour of a related party.
Delays and inaction	The liquidator does not take any steps to monetize the assets for a long time, which leads to their devaluation and increased costs.	Increased liquidation costs, delayed satisfaction of creditors and shareholders, uncertainty.
Breach of the duty to act with due care	The liquidator ignores the creditor's repeated urgings regarding its claim and does not include it in the list of claims.	A creditor may be prejudiced by the inability to assert its claim in time.
Exceeding legal authority	The liquidator, on behalf of the company in liquidation, will enter into a new lease agreement for the office space no longer needed by the company.	Creation of new liabilities for the company in liquidation that are not related to its dissolution.

When a liquidator breaks the law: how do the courts feel about it?

The activities of liquidators are subject to the supervision of the courts and liquidators can be held liable if they break the law. The courts consider whether the liquidator acted with due care and whether his or her actions were directed towards the orderly winding up of the liquidation and the satisfaction of creditors. Where a liquidator acts in breach of the law and causes damage, he may be liable to compensate for that damage. There are also cases where the courts have removed a liquidator from office for serious breach of his duties. In extreme cases, where the liquidator's actions amount to a criminal offence, criminal prosecution may be brought. For example, the Supreme Court dealt with a case of a liquidator who had mismanaged the company's funds and made a risky loan which was not repaid. In this case, the liquidator was found guilty of breach of duty in the management of someone else's property. Another case concerned an insolvency administrator and liquidator who was sentenced to imprisonment and a ban on activity for his criminal activities. The courts also emphasise that a company in liquidation can only carry out legal acts aimed at liquidation, thus limiting the powers of the liquidator.

Who can you turn to?

Your rights in liquidation proceedings.

As a creditor in liquidation proceedings, you have the right to be informed when a company enters liquidation. You should be invited to file your claims within a specified period of time. You also have the right to have your claim satisfied out of the proceeds of the sale of the company's assets in accordance with the priority set. If you suspect that the liquidator has acted unlawfully, you have the right to complain to the court that appointed the liquidator or to bring an action. The court may, on the application of a person who certifies a legal interest, remove a liquidator who fails to perform his duties properly.

As a debtor (in the case of a liquidation of your assets or as a former owner/shareholder of the company being liquidated) you have the right to be informed of the progress of the liquidation. Once all creditors have been satisfied and the costs of the liquidation have been paid, you are potentially entitled to receive the remaining assets (the liquidation balance). Again, you have the right to challenge the liquidator's actions if you believe they are unlawful.

If you suspect that the liquidator has acted unlawfully, you can take the following steps:

• Filing a complaint: you can file a formal complaint with the court that appointed the liquidator or with other competent authorities.
• Take legal action: you have the option of taking legal action against the liquidator to recover damages caused by his/her unlawful conduct or to challenge specific actions.
• Application for court intervention: You can ask the court to review the liquidator's actions or to remove the liquidator from office if there is evidence of misconduct.
• Consult a lawyer: In any case, it is advisable to consult a law firm specialised in liquidation proceedings as soon as possible to help you understand your rights and choose the most appropriate course of action.

Risks and financial losses.

A liquidator's misconduct can have serious negative consequences and lead to significant financial losses for all parties involved. For creditors, this may mean a reduction in the amount of satisfaction of their claims due to the devaluation or ineffective sale of assets. For the company and its owners/shareholders, assets may be lost due to misappropriation or misappropriation. Delays in the liquidation process increase administrative costs and prolong the period of uncertainty. Legal liabilities and penalties may also arise in the event of malpractice. In addition, reputational damage may occur for the entrepreneur.

How to protect yourself against unfair practices by liquidators: practical advice

To minimise the risk of unfair practices by a liquidator, we recommend:

• Thoroughly vet the liquidator: if possible, find out about their previous experience and reputation.
• Stay informed: actively monitor the progress of the liquidation proceedings and regularly request information from the liquidator.
• Carefully review all documentation: Thoroughly study financial reports, asset valuations and proposed transactions.
• Attend creditors' meetings: If you are a creditor, actively participate in meetings to keep informed and to raise any concerns.
• Document everything: Keep all correspondence, transaction records and any suspicious circumstances.
• Seek legal advice early: If you have any concerns or suspect wrongdoing, do not hesitate to contact a law firm specializing in liquidation proceedings as soon as possible. Early legal intervention can prevent more serious problems.
• Know your rights: Be aware of your rights as a creditor or debtor in liquidation proceedings.
• Don't be afraid to challenge suspicious actions: If you have legitimate concerns about the liquidator's actions, don't hesitate to raise them with the liquidator, the court or your solicitor.

We understand your concerns.

We know that winding up a company can be a challenging time full of uncertainty and worry, whether you are in the role of owner, creditor or debtor. We understand your concerns about the fate of your assets and financial stability. Rest assured that you are not alone in this situation and that there are legal mechanisms in place to protect your interests. Seeking professional legal advice is a proactive step to ensure that the liquidation process is conducted in accordance with the law and that your rights are fully respected.

Conclusion.

The assets of a company in liquidation are not without protection and liquidators do not have unlimited power. Their activities are strictly regulated by laws that protect the interests of all parties involved. Improper action by a liquidator can lead to serious financial losses and other negative consequences. Therefore, it is crucial to know your rights and not hesitate to act if you suspect wrongdoing. We strongly recommend you seek professional legal assistance from a law firm experienced in liquidation proceedings. Experienced lawyers can help you navigate the complex liquidation process, ensure your rights are protected and minimize the risk of financial loss. Contact us today so we can provide you with the support and expert advice you need.