Let’s start from the top. For years, the Commercial Register allowed companies to operate in the Estonian business environment as if disclosure of economic figures was optional. Last year, an abrupt change in direction occurred.
With the entry into force of the Commercial Register Act, the registrar was given greater rights in regard to levying fines on and/or deleting businesses from the register for failure to file an annual report by the deadline. According to the explanatory memorandum, the goal of the regulation is to improve discipline among companies and increase the trustworthiness of the economic environment.
Thus, legal persons can now be fined for failure to file an annual report by the deadline – with no advance warning. The registrar has been granted broad discretion on whether to impose a fine, meaning that a fine can be levied repeatedly until the report is filed. Among other things, it can consider, in deciding to impose a fine and the amount, how many times the legal person has failed to submit a report on time in the past, how much time has passed since the deadline and other circumstances that are considered important for the registrar.
As a second measure, the registrar can delete the legal person from the register if it fails to file the report within the term set by the registrar and at least three months have passed since the deadline required by law. An additional requirement for deletion is that the company lacks the assets entered into the register and the person cannot be a party to any court proceedings in progress.
It is since become clear that the Commercial Register has, in earnest and automatically, started pursuing compulsory dissolution and deletion of companies. If a company has employees and is doing business, however, such an approach by the registrar should not be considered correct or furthering the intended aims.
Does deletion of a going concern that pays employees wages improve the business environment? Legislators have not thought through the practical implications of deletion of businesses, because the current exclusions to deletion – registered assets or participation in judicial proceedings – outweigh the actual business activity and existence of employees. Among other things, the state would be deprived of tax revenue, which seems short-sighted given the current condition of the state budget.
True, the register should and must be purged of companies who maliciously shirk their obligations. But those non-compliant companies that have entered employees in the employment register, declare and pay workforce taxes and other taxes every month, and in such a case, the first option – monetary fine – could be used to bring the companies in line. After all, as noted, the fine can be levied more than once.
We have also asked MPs for an explanation and received interesting feedback: the suggestion that employees should file action in court to prevent the company from being deleted. In other words, employees are saddled with the obligation to constantly track procedural information disclosed on their employer and keep at the ready a potential statement of claim against their employer. But an employee who is satisfied with their job and who gets paid on time, whose taxes are paid on time on their earnings, shouldn’t be drawn into this process; they shouldn’t’ even have to think about it!
Under law, companies have the possibility of being reinstated within three years of the deletion date if the shortcomings are eliminated, meaning in this case that the outstanding annual reports are filed. But what happens in the meantime? The company has been deleted from the register, the employees’ employment relationships have been terminated (the Labour Inspectorate says it considers this a layoff situation) and reinstatement takes time (the auditors’ docket is an average of five or six months long). In other words, if the company’s annual report is subject to audit requirements and the auditor can only get around to auditing the several months later, the company can only be reinstated after the report is audited. A deleted company cannot operate or participate in business activity. Even if it is reinstated, employees’ continuous employment period has been interrupted, they lose their health insurance, too, after some more time has passed, and obviously the company’s financial health will suffer. Along with the other aspects, deletion of a company from the register means that the company loses access to its bank account, meaning that employees cannot be paid for their work, fulfil tax obligations and so on.
We have also had situations where a service provider has been dissolved compulsorily at the initiative of the Commercial Register but it continues to do business and invoices have been sent out for services provided. Here, too, there is a lack of legal clarity. The safest recommendation for customers of such a company is not to pay the invoices, but what if the invoice has already been paid?
In our opinion, the invoice recipient has only poor options to choose from. Should it pay for the services and take the risk that the payment might be considered ineligible as a business expense? In addition, there is additional expense from VAT, if VAT was charged on the invoice, since it isn’t possible to claim a deduction for input VAT paid on an invoice sent by a deleted company. The alternative could be to declare the disbursement as a payment made to a specific natural person. And finally, there is the option of being naïve and hoping that the service provider will be reinstated in the register.
To sum up this lengthy explanation, the current practice used by the Commercial Register is not acceptable. Businesses that failed to do work over a period of years are now suddenly being held accountable, without substantive analysis being performed. The compulsory dissolution of companies can in no way be accepted if the company is active and has registered employees, pays taxes on employee earnings and is posting results, since closing an operating business is not something that makes the business environment better or increases trust in the business environment. All the more so considering that the registrar has an alternative – fining the company, which ultimately also exerts a disciplining effect.
Calling companies to order must not result in greater harm for the economic environment as a whole and increase unemployment. Compulsory dissolution should be faced only by the companies that are not actually involved in actual business activity and maliciously fail to comply with the obligation.
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