Liquidation

Liquidation

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In law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...

, liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution
Dissolution (law)
In law, dissolution has multiple meanings.Dissolution is the last stage of liquidation, the process by which a company is brought to an end, and the assets and property of the company redistributed....

, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...

, an authority
Authority
The word Authority is derived mainly from the Latin word auctoritas, meaning invention, advice, opinion, influence, or command. In English, the word 'authority' can be used to mean power given by the state or by academic knowledge of an area .-Authority in Philosophy:In...

 or agency
Government agency
A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...

 in a country
Country
A country is a region legally identified as a distinct entity in political geography. A country may be an independent sovereign state or one that is occupied by another state, as a non-sovereign or formerly sovereign political division, or a geographic region associated with a previously...

 responsible for collecting and safeguarding customs duties
Duty (economics)
In economics, a duty is a kind of tax, often associated with customs, a payment due to the revenue of a state, levied by force of law. It is a tax on certain items purchased abroad...

, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation) or voluntary (sometimes referred to as a shareholders' liquidation, although some voluntary liquidations are controlled by the creditors, see below).

Compulsory liquidation


The parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by:
  1. the company itself
  2. any creditor
    Creditor
    A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...

     who establishes a prima facie
    Prima facie
    Prima facie is a Latin expression meaning on its first encounter, first blush, or at first sight. The literal translation would be "at first face", from the feminine form of primus and facies , both in the ablative case. It is used in modern legal English to signify that on first examination, a...

    case
  3. contributories
  4. the Secretary of State
    Secretary of State (U.S. state government)
    Secretary of State is an official in the state governments of 47 of the 50 states of the United States, as well as Puerto Rico and other U.S. possessions. In Massachusetts, Pennsylvania, and Virginia, this official is called the Secretary of the Commonwealth...

     (or equivalent)
  5. the Official Receiver
    Official Receiver
    An officer of the Insolvency Service of the United Kingdom, the Official Receiver is an officer of the court to which he is attached. The OR is therefore answerable to the courts for carrying out the courts' orders and for fulfilling his duties under law...


Grounds


The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the normal grounds to enable an application to the court for an order to compulsorily wind-up the company are:
  1. the company has so resolved
  2. the company was incorporated as a public company
    Public company
    This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...

    , and has not been issued with a trading certificate (or equivalent) within 12 months of registration
  3. it is an "old public company" (i.e., one that has not re-registered as a public company or become a private company under more recent companies legislation requiring this)
  4. it has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time
  5. the number of members has fallen below the minimum prescribed by statute
  6. the company is unable to pay its debts as they fall due
  7. it is just and equitable to wind up the company


In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds.

An order will not generally be made if the purpose of the application is to enforce payment of a debt which is bona fide disputed.

A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to equitable considerations. It can take account of personal relationships of mutual trust and confidence in small parties, particularly, for example, where there is a breach of an understanding that all of the members may participate in the business, or of an implied obligation to participate in management. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director.

The order


Once liquidation commences (which depends upon applicable law, but will generally be when the petition was originally presented, and not when the court makes the order), dispositions of the company's property are generally void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....

, and litigation involving the company is generally restrained.

Upon hearing the application, the court may either dismiss the petition, or make the order for winding-up. The court may dismiss the application if the petitioner unreasonably refrains from an alternative course of action.

The court may appoint an official receiver, and one or more liquidators, and has general powers to enable rights and liabilities of claimants and contributories to be settled. Separate meetings of creditors and contributories may decide to nominate a person for the appointment of liquidator and possibly of supervisory liquidation committee.

Voluntary liquidation


Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. Voluntary liquidation begins when the company passes the resolution, and the company will generally cease to carry on business at that time (if it has not done so already). If the company is solvent, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary winding-up. In such case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditor's voluntary winding-up, and a meeting of creditors will be called, to which the directors must report on the company's affairs. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed.

Where a voluntary winding-up of a company has begun, a compulsory liquidation order is still possible, but the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the contributories.

In addition, the term liquidation is sometimes used when a company wishes to divest itself of some of its assets. This is used, for instance, when a retail establishment wishes to close stores. They will sell to a company that specializes in store liquidation instead of attempting to run a store closure sale themselves.

Misconduct

Main articles: Fraudulent trading
Fraudulent trading
Fraudulent trading is an insolvency law concept, and in particular a UK insolvency law concept. It refers to a company that has carried on business with intent to defraud creditors.-Law:...

, Undervalue transaction
Undervalue transaction
An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors....

, Unfair preference
Unfair preference
An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair...

 and Wrongful trading
Wrongful trading
Wrongful trading is a type of civil wrong found in UK insolvency law, under s 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company....

.


The liquidator will normally have a duty to ascertain whether any misconduct has been conducted by those in control of the company which has caused prejudice to the general body of creditors. In some legal systems, in appropriate cases, the liquidator may be able to bring an action against errant directors or shadow directors for either wrongful trading
Wrongful trading
Wrongful trading is a type of civil wrong found in UK insolvency law, under s 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company....

 or fraudulent trading
Fraudulent trading
Fraudulent trading is an insolvency law concept, and in particular a UK insolvency law concept. It refers to a company that has carried on business with intent to defraud creditors.-Law:...

.

The liquidator may also have to determine whether any payments made by the company or transactions entered into may be voidable
Voidable
In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ab initio and unenforceable....

 as a transaction at an undervalue
Undervalue transaction
An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors....

 or an unfair preference
Unfair preference
An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair...

.

Priority of claims


The main purpose of a liquidation where the company is insolvent is to collect in the company's assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law.

The liquidator must determine the company's title to property in its possession. Property which is in the possession of the company, but which was supplied under a valid retention of title clause will generally have to be returned to the supplier. Property which is held by the company on trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...

 for third parties will not form part of the company's assets available to pay creditors.

Before the claims are met, secured creditor
Secured creditor
A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...

s are entitled to enforce their claims against the assets of the company to the extent that they are subject to a valid security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...

. In most legal systems, only fixed security takes precedence over all claims; security by way of floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...

 may be postponed to the preferential creditor
Preferential creditor
A preferential creditor is a creditor receiving a preferential right to payment upon the debtor's bankruptcy under applicable insolvency laws....

s.

Claimants with non-monetary claims against the company may be able to enforce their rights against the company. For example, a party who had a valid contract for the purchase of land against the company may be able to obtain an order for specific performance
Specific performance
Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to award/ for awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential...

, and compel the liquidator to transfer title to the land to them, upon tender of the purchase price.

After the removal of all assets which are subject to retention of title arrangements, fixed security, or are otherwise subject to proprietary claims of others, the liquidator will pay the claims against the company's assets. Generally, the priority of claims on the company's assets will be determined in the following order:
  1. Liquidators costs
  2. Creditors with fixed charge over assets
  3. Costs incurred by an administrator
  4. Amounts owing to employees for wages/superannuation (director limit $2000)
  5. Payments owing in respect of workers's injuries
  6. Amounts owing to employees for leave (director limit $1500)
  7. Retrenchment payments owing to employees
  8. Creditors with floating charge over assets
  9. Creditors without security over assets


Unclaimed assets will usually vest in the state as bona vacantia
Bona vacantia
Bona vacantia is a legal concept associated with property that has no owner. It exists in various jurisdictions, with consequently varying application, but with origins mostly in English law.-Canada:...

.
See also: Secured creditor
Secured creditor
A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...

, Preferential creditor
Preferential creditor
A preferential creditor is a creditor receiving a preferential right to payment upon the debtor's bankruptcy under applicable insolvency laws....

 and Unsecured creditor
Unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor....


Dissolution


Having wound-up the company's affairs, the liquidator must call a final meeting of the members (if it is a members' voluntary winding-up), creditors (if it is a compulsory winding-up) or both (if it is a creditors' voluntary winding-up). The liquidator is then usually required to send final accounts to the Registrar and to notify the court. The company is then dissolved.

However, in most jurisdictions, the court has a discretion for a period of time after dissolution to declare the dissolution void to enable the completion of any unfinished business.

Striking off the Register


In some jurisdictions, the company may elect to simply be struck off the Register as a cheaper alternative to a formal winding-up and dissolution. In such cases an application is made to the Registrar, and they may strike off the company if there is reasonable cause to believe that the company is not carrying on business or has been wound-up and, after enquiry, no case is shown why the company should not be struck off.

However, in such cases the company may be restored to the Register if it is just and equitable so to do (for example, if the rights of any creditors or members have been prejudiced).

In the event the company does not file an annual return or annual accounts, and the company's file remains inactive, in due course, the Registrar at Companies House will strike the company off the register.

Fresh Start Options for Limited Companies (Ltd)


In the UK, many companies in debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 decide it's more beneficial to start again by creating a new company, often referred to as a 'phoenix' company. In business terms this will mean liquidating a company as the only option and then resuming under a different name with the same customers, clients and suppliers. In some circumstances it can be ideal for the company. It can be a way to start trading profitably having left unfavourable lease agreements and historic debt behind. Administration (law)#Pre-pack administration

As a metaphor


In informal usage, ""liquidation" can mean the murder of a person or group who threaten a country or political organisation.

The term was used frequently by leftists in the 1920s and '30s, especially in the Stalinist Soviet Union, and by the fascist Nazi party pre-1945. It is not clear whether liquidation always meant immediate death, or whether it meant relocation to a labour or death camp, and premature death.

See also

  • Bankruptcy
    Bankruptcy
    Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

  • Chapter 7, Title 11, United States Code
    Chapter 7, Title 11, United States Code
    Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...

  • Debtor-in-possession financing
    Debtor-in-possession financing
    Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress or under Chapter 11 bankruptcy process. Usually, this security is more senior than debt, equity, and any other securities issued by a company...

  • Liquidating dividend
    Liquidating dividend
    A liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...

  • Liquidator (law)
    Liquidator (law)
    In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....