Dissolution and liquidation of companies – legal frameworks and responsibilities

Dissolution and liquidation of companies represent the final phase in a company's lifecycle. This is a formalized process with clear legal frameworks that aim to safeguard the interests of the company, participants, creditors, and other affected parties. This article provides an overview of the key legal aspects of dissolution and liquidation of companies in Norwegian law.

The Difference Between Dissolution and Liquidation

It is important to distinguish between the terms dissolution and liquidation:

• Dissolution involves the establishment or acknowledgment of a basis for liquidation

• Liquidation (also known as deregistration) is the subsequent process where the company realizes its assets, settles its liabilities, and distributes any remaining capital to the participants

A company is not considered definitively ceased until the liquidation phase is completed. Both the Companies Act and the Partnership Act contain detailed provisions on dissolution and liquidation, respectively in the Companies Act/Public Limited Companies Act Chapter 16 and the Partnership Act §§ 2-37 to 2-42.

Grounds for Dissolution

Dissolution by Decision of the Participants

The most common reason for dissolution is that the participants themselves decide to terminate the company relationship and business. The decision rules vary according to company form:

For limited companies and public limited companies:

• The decision is made by the general meeting with a two-thirds majority

• This applies to both the votes cast and the share capital represented at the general meeting

• Legal basis: Companies Act/Public Companies Act § 16-1 first paragraph, cf. § 5-18

For partnerships:

• The decision is made by the majority that may be specified in the partnership agreement

• In the absence of such an agreement, consent from all partners is required

• Legal basis: Partnership Act § 2-37 first paragraph, cf. § 2-12 first paragraph

It is important to note that dissolution must be distinguished from the sale or closure of business. Such decisions can normally be made by the board, possibly the general meeting, with a simple majority.

Dissolution Upon Request by a Participant

In special situations, individual participants may have the right to demand that the company be dissolved without the consent of the other participants:

For partnerships an individual partner can demand the company be dissolved immediately when:

• Their right has been violated by a material breach of the company relationship, and a reference to withdrawal under § 2-32 would not be reasonable, or

• Otherwise, weighty reasons argue for dissolution

The company meeting must comply with such a demand. If not, the one who demanded dissolution can have the company dissolved by court order, cf. Partnership Act § 2-37 third paragraph.

For limited companies and public limited companies a shareholder can demand the company be dissolved by court order when:

• A company organ or others representing the company have acted in violation of Companies Act/Public Companies Act §§ 5-21 and 6-28 (the rules on abuse of power)

• "Particularly weighty reasons" argue for dissolution as a result of this

The requirement for "particularly weighty reasons" sets a high bar. The Supreme Court in the Bergshav Holding judgment (HR-2016-1439-A) has established that dissolution by court order is only relevant where other sanctions for abuse must be deemed insufficient. Relevant factors in the assessment are:

• The duration and severity of the abuse

• What other sanctions for abuse are available

• Whether the plaintiff has previously attempted such sanctions

• What attempts have been made to reach an agreement

• The consequences a dissolution might be expected to have

The Liquidation Process

Once the basis for dissolution is established, the company enters the liquidation phase. The business does not immediately cease, but is restructured with a view to a controlled winding-up within a relatively short time period.

Responsibility for Liquidation

In partnerships:

• The company meeting undertakes the liquidation, unless a participant demands that a separate liquidation board be elected

• Legal basis: Partnership Act § 2-38 first paragraph

In limited companies/public limited companies:

• The board undertakes the liquidation of the company

• The general manager ceases to function, and the board acts in place of the general manager

• Legal basis: Companies Act/Public Companies Act § 16-2

Protection of Creditors' Interests

A central element in the liquidation process is the protection of creditors' interests. This is ensured through several mechanisms:

1. Announcement and Notification:

   • Creditors must be notified and given the opportunity to file their claims

   • Legal basis: Partnership Act §§ 2-39 to 2-41 and Companies Act/Public Companies Act §§ 16-3 et seq.

2. Prioritization of Debt:

   • The company's funds cannot be distributed to the participants until the company's obligations to creditors are paid

   • Alternatively, sufficient funds to cover known liabilities can be set aside

   • Legal basis: Companies Act/Public Companies Act § 16-9 and Partnership Act § 2-41 third paragraph

3. Liquidation Dividend:

   • Only the net remaining funds after all obligations are met can be distributed to participants as a liquidation dividend

Participants' Responsibility After Dissolution

Participants' liability after completed liquidation varies according to company form, in accordance with the fundamental liability forms:

In partnerships:

• Participants' liability to creditors does not cease due to dissolution/liquidation

• This is a natural consequence of the liability form "direct and personal liability"

• Legal basis: Partnership Act § 2-42 first paragraph

In limited companies and public limited companies:

• Shareholders are not personally liable for the company's obligations beyond the share contribution

• Nevertheless, shareholders are jointly liable for any uncovered liabilities directly to creditors

• Liability is limited to the value of what the individual has received as a distribution after the dissolution

• Legal basis: Companies Act/Public Companies Act § 16-12 first paragraph first sentence

The Supreme Court clarified in the Red Cross judgment (HR-2018-1983-A) that all distributions to shareholders after the expiration of the creditor deadline are covered by the provision, not just the distribution of liquidation share, but also such distributions designated as dividends.

The Board's Responsibility

Board members in limited companies/public limited companies have a special responsibility during liquidation:

• They are jointly and unlimitedly liable for any uncovered obligations upon dissolution

• The liability applies unless it is proven that the members have acted with due diligence

• Legal basis: Companies Act/Public Companies Act § 16-12 first paragraph second sentence

In the Visit Moss judgment (HR-2019-317-A), the Supreme Court clarified that the board has considerable leeway in assessing disputed claims, and liability for damages is only relevant if the conduct is clearly reckless.

Conclusion

Dissolution and liquidation of companies is a formalized process with clear legal frameworks. The main purpose of the regulations is to ensure an orderly liquidation that safeguards the interests of creditors while respecting the rights of the participants. The different rules for limited companies and partnerships reflect the fundamental differences in liability form and typical ownership structure between company types. For all parties involved, it is important to have a good knowledge of the regulations to ensure a tidy and legally sound termination of the company relationship.