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A balance sheet for liquidation purposes protects board members

Are you facing economic challenges? A balance sheet for liquidation purposes is a way of protecting a limited company’s capital if it doesn’t have enough income to cover its costs. In this article we look at what a balance sheet for liquidation purposes is and why it’s needed.

At the first suspicion that more than half of a limited company’s equity has been used, it is the board’s responsibility to draw up a balance sheet for liquidation purposes as soon as possible. It is important to prepare this type of balance sheet to protect board members against future risks as they could become personally liable for the company’s liabilities.

How is a balance sheet for liquidation purposes drawn up?

A balance sheet for liquidation purposes should be based on the most recently submitted and reconciled monthly report. Then make adjustments if the company has any hidden assets that can be realised, or if the value of balance sheet items on the asset side are higher than their book value. A revaluation could be a building with a higher market value than its book value. The company may also have a surplus in a share deposit account or have another financial asset that can be written up. These are examples of revaluations that can be made in a balance sheet for liquidation purposes, but not in the standard accounts.

The company should also review other receivables in the company. If you do not think the company will receive 100% of, for example, its accounts receivable, a provision for doubtful receivables needs to be made in the balance sheet for liquidation purposes. Reviews of receivables and liabilities must be accurately recognised in the most recently reconciled monthly report.

As regards liabilities, you should make sure that all accounts payable are recorded. The company may have unused credit notes, and if so, you should deduct these on payment. The company may also request to defer payments to suppliers and the tax agency.

The government’s crisis package for the coronavirus pandemic 

Due to the current circumstances during the coronavirus pandemic, companies now also have the option of requesting deferred payment of taxes to the Swedish Tax Agency. The repayment is only deferred, so remember that the liability to the Swedish Tax Agency still stands and that the company will also pay interest and fees on the amount deferred.

When it comes to staff, there are two options during these difficult times. The first measure relates to social security contributions on salaries, which can be reduced for up to 30 employees with a gross salary of up to SEK 25,000 a month. The company pays social security contributions for this group at 10.21% instead of 31.42%.

The second measure the company can take regarding staff is to furlough staff. It’s important to bear in mind that staff may not be furloughed during their holiday leave. 

Read more about furloughing staff here 

What happens once a company has prepared a balance sheet for liquidation purposes?

Once the balance sheet for liquidation purposes is ready, it has to be reviewed by the company’s auditors. If the company does not have an auditor, follow the guidance in the next sentence. If the balance sheet for liquidation purposes shows that half of the share capital is still used up, the matter of the company’s liquidation is referred to the board and an initial meeting for liquidation purposes. At the first meeting for liquidation purposes, the company decides to either liquidate or to refer the matter to a new meeting to be held within eight months. If the share capital has not been restored by the second meeting for liquidation purposes, the board must apply for the company to go into liquidation (the Companies Act, chapter 25, §§13-20).

If the board does not prepare a balance sheet for liquidation purposes in time, they will be liable to pay all of the company’s obligations and taxes to the Swedish Tax Agency and that could be very costly indeed. It is important to take any indication that share capital is beginning to whittle down seriously and to quickly examine what can be done to remedy the situation.

In today’s special situation with coronavirus, the Swedish Tax Agency may be more lenient in its assessment if the company has submitted an application to defer payment of liabilities. If, however, no liquidation measures have been taken by the company and it continues to lack liquidity, the Swedish Tax Agency will apply for the board to be made jointly and severally liable for the company’s liabilities to the Tax Agency.

How to cover deficits?

What can a company’s owners do if the deficit continues? You could, for example, make a shareholder contribution that is conditional or unconditional. A conditional shareholder contribution means that the company repays the amount as soon as its equity is restored. If the company is part of a group and there are liabilities and receivables between the companies, you can also write down liabilities within the group, such as accounts payable. A parent company can also provide a capital adequacy guarantee. We will go into this in more detail in a later article.

Questions often arise about the rules for meetings and formalities in the Companies Act, and at Azets we often help our customers by clarifying the rules. If anything is unclear, please contact us so that no unnecessary errors relating to legal requirements for deficits affect the board.