Alternative liquidation of a private company: how to sell a company for 100 000 rubles ($ 1 300) and lose 10 000 000 rubles ($ 130 000) (a case from our practice)

Imagine a situation where the owner sells a company and believes sincerely that he has liquidated it. Naturally, he forgets about all the former problems of the company and goes about his business. But after 6 months, he starts receiving phone calls:

• from contractors that burst out into obscenities;
• from buyers that don’t understand why they are suddenly facing claims from tax authorities, when they have already paid for the goods purchased from the company;
• from tax officials trying to figure out what's going on, mentioning words like "penalty", "fraud" and "legal proceedings".

Suddenly, the former owner receives an offer from the new owner of the private company to buy the same company for 10 000 000 rubles ($ 130 000). The former owner is ready to do anything to stop this chaos.

Liquidation through sale has nothing to do with the company’s closure. The new owner not only assumes the obligations but also gains all the rights which he can use to get money by blackmailing the previous owner of the company. The blackmail can be carried out by three scenarios.

The information is gathered about all the contractors who provided any services to the company, as well as about the buyers, for the past 3 years. And the most interesting about it is the following:

• The claims are made against all the contractors, stating that they had failed to deliver goods because the previous owner allegedly didn’t provide any supporting documents. Naturally, the contractors are demanded to make the delivery or refund the money. And they have to prove that they fulfilled their obligations, which is not always easy to do.
• All incoming declarations are reset. Since the declarations submitted by the contractors are now verified by the automated tax control system, resetting the declarations causes a "direct tax gap" status in the system. The tax authorities start investigating the contractors who purchased goods from the company.

This is the most common scenario for blackmailing the former owner during the alternative liquidation of a private company through sale. Both buyers and suppliers start calling and questioning the previous owner about the situation. The most frustrating thing is that the extortion is evident, but it's difficult to initiate criminal proceedings against the new owner. In fact, he simply sells a company which was acquired via a notarized transaction.

The new owner may break bad and create an artificial debt, initiating bankruptcy proceedings. In this case, all the transactions will be examined according to the rules of the bankruptcy law, meaning that the burden of proof falls on the contractors.

The search for issues in the accounting reports begins, such as unpaid liabilities to creditors or missing inventory in the balance sheet. All the lines in the reports are analysed to find any fault. Then, the blackmail of the former owner starts by the threat of reporting to the relevant authorities.

The alternative liquidation of a company is directly connected to the possible reveal of all the problems. The new owner may start revealing the deferred tax risks, such as fictitious VAT or transactions with transit companies. If anything is discovered, the new owner has every right to report to the Investigative Committee, stating that the company was purchased with deferred tax risks for a certain amount. This is how the previous owner can be blackmailed. At the best, the company can simply be repurchased.

In the situation described, it will be impossible to accuse the new owner even of extortion. If real tax violations took place, the previous owner may face liability under Article 199 of the Criminal Code of the Russian Federation (evasion of taxes and fees).

But these are only the problems that may arise if the new owner decides to profit from the previous owner. There are still numerous risks connected with the alternative liquidation of a legal entity. Let's talk about the main ones.

Over the past 10 years, the Federal Tax Service has become adept at easily identifying cases of the alternative liquidation of private companies with debts. And today, with the advent of special software and neural networks, the process is accelerated by much. The participants of this scheme may be held criminally liable for:

• Creation or reorganisation of a legal entity via straw persons under Article 173.1 of the Criminal Code of the Russian Federation; providing data that led to the inclusion of information about straw persons in the Unified State Register of Legal Entities (the punishment is a fine of up to 500 000 rubles ($ 6 600), compulsory labour for up to 3 years, or imprisonment for up to 5 years).
• Providing an identity document or issuing a power of attorney if this is done to include information about a straw person in the Unified State Register of Legal Entities under Article 173.2 of the Criminal Code of the Russian Federation (the punishment is a fine ranging from 100 000 to 300,000 rubles ($ 1 300 to 4 000), compulsory or corrective labour, or imprisonment for up to 3 years).
• If these documents were acquired free of charge or for a fee, the same article is applied: a fine ranging from 100,000 to 300,000 rubles ($ 1 300 to 4 000), compulsory labour for up to 3 years, or imprisonment for 3 years.

Additionally, in the case of deliberate bankruptcy, controlling persons of the debtor (owners, executives) may be held criminally liable under Article 196 of the Criminal Code of the Russian Federation.

Sometimes, during the alternative liquidation of a private company, a nominal director is appointed, who is unaware of the problems of the company. The new owner may report fraud to the police if he decides that the company with debts and issues was sold to him intentionally. Even if there are no actual problems, a report to law enforcement authorities will lead to a thorough investigation. The previous owner will have to prove his innocence.

If the Unified State Register of Legal Entities (ЕГРЮЛ) indicates false information about a company, tax authorities have a right to liquidate the company as inactive after 6 months. In this case, the founders and the director are disqualified, meaning they are prohibited from registration of a new legal entity in their names for a period of 3 years.

The situation for the company owner becomes significantly complicated if he sells the legal entity and the new owner attempts to liquidate it based on false information. In such cases, the founders and the director who were managing the company at the time the debts arose become responsible for all the company's liabilities. In a standard situation, to hold them subsidiarily liable, it is necessary to go through the bankruptcy procedure of the private company and prove the guilt of the director/founders. However, in the case of liquidation based on false information, they can be immediately held subsidiarily liable.

There are many promises of a "fast" and "trouble-free" company liquidation through sale circulating online.

Attempting to close a company by any of the alternative methods is equivalent to taking enormous risks. Currently, 4 most popular methods of alternative liquidation, with or without debts, are:

1. "Handing the company over to good hands" — selling the company, transferring it to an offshore entity, or merging it with another legal entity.
2. Liquidation of the company by the tax authority for the reason of false information.
3. Liquidation of the inactive company.
4. Transformation of a private company into a joint stock company (JSC)

In the first case, when selling a company, all its obligations and rights are transferred to the new owner along with the legal entity itself. As mentioned before, there are numerous risks involved. Firstly, the Federal Tax Service has become very efficient in detecting such transactions. In case of investigations, the participants may face not only fines but also imprisonment for up to 6 years. Secondly, the new owner can create a multitude of problems by exercising the acquired rights within the legal entity, such as demanding money from contractors or reporting fraud to law enforcement authorities.

Liquidation of a legal entity based on false information entails imposing various restrictions on the directors and founders of the company. For example, it may be difficult to make changes in the Unified State Register of Legal Entities for another legal entity. In the case of liquidating an inactive company, similar to other situations, the risks that arise for the company can be attributed to the founder or the director of that company.

The alternative liquidation of a legal entity through the transformation of a private company into a JSC also carries hidden risks. According to the law, the owner cannot be held subsidiarily liable when liquidating a JSC. However, if the law changes, it will have retroactive effect, meaning even if the application was submitted a year ago, the owner will become subject to subsidiary liability.

Considering all the risks and the illegality of alternative liquidation, in my practice, I use only two methods: bankruptcy if the company has no funds, and voluntary liquidation if there are funds available. Of course, before applying for liquidation, it is vital to analyse the tax risks. This will help to understand the potential problems in the future liquidation process and to prepare for their resolution. Most importantly, it will minimise violations, rectify the company's accounting, and minimise tax risks, so that significant sums of money are saved.