But what if a company fails to submit an annual report?

As we know, companies must submit their annual reports within 6 months after the end of the financial year. But what happens if a private limited company, public limited company, non-profit or commercial association, foundation, general partnership, or a limited partnership with at least one legal owner fails to submit their annual report to the registrar within this period of time?

This question is responded by the county court registration department. In such cases, if the annual report is not submitted within the determined period of at least the following six months, a warning is filed to the company by the registrar regarding deletion of the company from the register.

Let’s use an example to examine the situation

Companies usually set the end of the year, i.e., December 31, as the end of their financial year. Thus, the annual report must be submitted to the registrar by June 30 at the latest. Even though a penalty can also be imposed if the annual report is not submitted on time, let us presume that, in our example, this has also not proven futile. After another 6 months, i.e., in January the year after, the registrar starts issuing deletion warnings and a regulation is issued to the company stating that the report must be submitted within the next 6 months. When this deadline has also passed and the annual report still has not been submitted, a respective announcement is published in the Official Announcements. The announcement calls the creditors of the company to report their claims against the company and apply for execution of a liquidation procedure within the following six months. The period of six months commences from the date of publishing the announcement. A warning is also published along with the announcement stating that the company may be deleted from the register even without no claims from the creditors being received – without a liquidation procedure. If claims are received from the creditors, the case is handed over by the registrar to a court, which appoints a person in charge of the compulsory liquidation procedure and makes a decision over the compulsory liquidation of the company. If no such claims are received, the registrar files an inquiry to the Tax and Customs Board regarding the compulsory liquidation. If no response is received from the Tax and Customs Board (the Board responds if they object to deletion of the company), the deletion entry is executed by the assistant judge and also delivered to the company. After delivery of this deletion entry to the company, the final deletion entry is executed by the company.

All of the above mentioned procedures may also not provide a solution

Thus, putting together all of the above mentioned deadlines, it appears that the liquidation procedure may take as much as 2 years. But even this may not be the end of the issue – if the company has not submitted an annual report, but the Tax and Customs Board does not consent to the liquidation procedure, such company may (and, in practice, often does) end up figuring in the register for years and years.

From now on, the annual report will be thinner, but contains more data

Pursuant to the recently amended Accounting Act, most Estonian companies can now draw up annual reports, which are significantly thinner that the ones filed so far. For large companies, the new Accounting Act includes new requirements for information, which is not disclosed in the management report. Still, there are quite a few grey areas in the new Act – while the same accounting requirements have been applied to all companies so far, the picture is a lot fuzzier now and the Act must be read quite carefully to find the right clues. On the other hand, however, the Act makes the lives of microenterprises considerably easier.

Companies lined up by size

Based on the new act, it appears as if there is only one requirement for microenterprises – the balance sheet total. Thereat, it must be kept in mind that a microenterprise cannot be a VAT payer – the name applies to the companies that are not yet VAT payers. If a company actually is a non-VAT payer microenterprise, the owners of such companies can take care of the accounting of the company themselves. A more important fact here is that, based on the new Act, only microenterprises are permitted to only submit their annual reports.

From the perspective of determining the size of a company, the restriction UP TO is applied here, which means that only one criterion may be violated. If more than one criterion is violated, the company is of the next size group.

If, however, a company discovers in the year following the year in which the annual report was drawn up that the limits for their size group were exceeded, the company will move to the next category. On the other hand, the Act also prescribes that a company may only move to the next category in the third year after meeting the requirements.

Thinner annual reports do not mean less data

The new Act comes with a risk of the annual reports of microenterprises not being particularly informative, but it is also permitted to draw up an annual report based on the rules of a category of larger companies or the IFRS. On the other hand, it is not perhaps reasonable to take advantage of all new exemptions – while the full reports have also been used by Statistics Estonia so far, the companies will now have to start submitting separate reports to Statistics Estonia in the case of drawing up thinner annual reports.

Financial statements can now be filed with an optional date

Financial statements must be prepared on the form set out in the laws, and their preparation is compulsory for all entrepreneurs active in Estonia.

Duration of a company’s financial year

The financial year is usually deemed to be 12 months long and is normally set as lasting from 1 January to 31 December. The articles of association of a company may set out a different financial year. A financial year must not be longer than 18 months, but upon changing the start date of the financial year, founding a company or ending it, the financial year may be longer or shorter than 12 months.

Financial statements are prepared through the following stages:

1. preparing the annual accounts;
2. preparing the activity management report;
3. auditing (if required);
4. preparing a profit distribution proposal and adopting a decision to distribute the profit or to cover the loss;
5. presenting the financial statements for approval.

When are financial statements submitted?

Financial statements are submitted within 6 months after the end of the financial year. They are submitted to the Commercial Register, and the Company Registration Portal can be used for presenting them in electronic form.

While before, financial statements became public immediately after their submission to the Commercial Register, now companies can choose the date of submission of their financial statements. The relevant suggestion came from the Chamber of Commerce and Industry and the gist of the amendment is that when uploading the financial statements, you can now choose the date when the statements become publicly visible in the Register. If a date after the submission date was chosen, the financial statements will not be visible before that date to Statistics Estonia either, so Statistics Estonia cannot use the data presented in those financial statements until then.

A general meeting’s resolution can also be annulled by erroneous financial statements

Or, as the folk saying goes – measure twice, cut once.

Shareholders exercise their rights through general meeting, which is also the highest governing body of a public limited company (aktsiaselts – AS). The rules for summoning a general meeting and all its processes are precisely set out in the Commercial Code – shareholders do not participate directly in the company’s management.

But if those rules have been broken, it is possible to contest the resolutions of a general meeting, both to identify their original nullity and to apply for declaring them invalid. Here, the difference lies in the fact that a valid resolution remains in force until a court declares it invalid, but a void resolution is void from the start, i.e., it is like they never made that resolution.

A clear opinion in the Supreme Court

In its recent adjudication, the Supreme Court found that both resolutions of general meetings as well as financial statements approved by such resolutions could be discussed in that context. Therefore, under contesting a general meeting’s resolution, financial statements can also be contested. The reasoning is that the general meeting approving the year’s financial statements gets the content of the meeting precisely from those financial statements.

Financial statements for an economic year must provide fair and correct information about both the company’s economic results and its financial status, therefore any information that was left undisclosed in financial statements but which may have significance for economic decisions to be made on the basis of the financial statements is significant in this context.

The protection of debtors’ interests is important here and if the financial statements provide a significantly incorrect view of the enterprise’s financial status then the provisions protecting creditors are considered violated. It is for that reasoning that a general meeting’s resolution approving such financial statements is void. This rule is also set out in the Commercial Code, §301(1)1). The Court also considered it necessary to mention that minor shortcomings and deviations in the financial statements do not affect the validity of the resolution.

Did it badly – do it again

The nullity of a general meeting’s resolution approving financial statements must be identified by a court, but the law does not set out a specific time limit for protecting one’s rights. But as financial statements themselves must be presented compulsorily, not only the incorrect data of the financial statements must be corrected but also a new general meeting must be summoned. In that, the procedural rules set out in the Commercial Code must be followed, so that a deviation from the procedure to summon a general meeting would not become the grounds for nullity of the general meeting’s resolution in turn. All of the above is similarly valid to private limited companies (osaühing – OÜ).

RevalHansa is moving !

We have served our clients in our Tallinn’ office at Väike-Ameerika for over 10 years now. Time is surely flying ! But hereby though we are pleased to announce that it is time to move.

Our new premises are located at Sakala 22, Tallinn and we are open as of 19th of October.