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Encyclopedia > Liquidation

In law, liquidation refers to 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 can also be referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. This article needs cleanup. ... For other uses, see Law (disambiguation). ... The term company may refer to a separate legal entity, as in English law, or may simply refer to a business, as is the common use in the United States. ... Dissolution is also the term for the legal process by which an adoption is reversed. ...


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).


In finance, liquidation is also sometimes used as convenient shorthand for converting an asset to cash. This article is about the business definition. ... For other uses, see Cash (disambiguation). ...

Contents

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 who establishes a prima facie case
  3. contributories[1]
  4. the Secretary of State (or equivalent)
  5. the Official Receiver

A creditor is a party (e. ... Look up prima facie in Wiktionary, the free dictionary. ... In several countries, Secretary of State is a senior government position. ... The Official Receiver (usually abbreviated OR) is the name of a statutory office holder in England and Wales. ...

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 compulsorily wind-up the company are:

  1. the company has so resolved
  2. the company was incorporated as a public company, and has not been issued with a trading certificate (or equivalent) within 12 months of registration
  3. it is an "old public company" (ie. 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[2]

In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds. This article does not cite any references or sources. ...


An order will not generally be made if the real purpose of the application is other than for a winding-up, eg. the application is made just to enforce a debt.[3]


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,[4] or of an implied obligation to participate in management.[5] An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director.[6]


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[7]), dispositions of the company's property are generally void,[8] and litigation involving the company is generally restrained.[9] In law, void means of no legal effect. ... A lawsuit is a civil action brought before a court in order to recover a right, obtain damages for an injury, obtain an injunction to prevent an injury, or obtain a declaratory judgment to prevent future legal disputes. ...


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.[10]


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.Some business owner's will liquidate their merchandise through an online medium such as http://www.sellmyinventory.com to regain as much of their investment in the inventory as possible.


Misconduct

Main articles: Fraudulent trading, Undervalue transaction, Unfair preference and Wrongful trading

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 or fraudulent trading. In insolvency law, fraudulent trading refers to a company which has carried on business with intent to defraud creditors. ... An undervalue transaction is a transaction entered into by a company[1] who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtors creditors. ... In many legal systems, 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 preference or simply a preference. ... Wrongful trading is a principle of UK insolvency law. ... Wrongful trading is a principle of UK insolvency law. ... In insolvency law, fraudulent trading refers to a company which has carried on business with intent to defraud creditors. ...


The liquidator may also have to determine whether any payments made by the company or transactions entered into may be voidable as a transaction at an undervalue or an unfair preference. In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. ... An undervalue transaction is a transaction entered into by a company[1] who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtors creditors. ... In many legal systems, 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 preference or simply a preference. ...


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. This article is in need of attention. ...


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 for third parties will not form part of the company's assets available to pay creditors.[11] A retention of title clause (also called a Romalpa clause in some jurisdictions[1]) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until certain obligations (usually payment of the purchase price) are fulfilled by the buyer. ... This law-related article does not cite its references or sources. ...


Before the claims are met, secured creditors are entitled to enforce their claims against the assets of the company to the extent that they are subject to a valid security interest. In most legal systems, only fixed security takes precedence over all claims; security by way of floating charge may be postponed to the preferred creditors. A secured creditor is a creditor which has the benefit of a security interest over some or all of the assets of the debtor. ... 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 but not always the payment of a debt) which gives the beneficiary of the security interest certain preferential rights in relation to the assets. ... A floating charge is a security interest over all of the assets of a company which floats until an event of default is triggered or until the company goes into insolvent liquidation at which time the floating charge crystallises and attaches to all of the assets of the company. ... A preferential creditor (in some jurisdictions called a preferred creditor) is a creditor who receives a preferential right to payment upon the debtors bankruptcy under applicable insolvency laws. ...


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, and compel the liquidator to transfer title to the land to him, upon tender of the purchase price.[12] Definition of Specific performance In the law of remedies, a specific performance is a demand of a party to perform a specific act. ...


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. Firstly, the costs of the liquidation are met out of the company's remaining assets
  2. Secondly, the preferred creditors under applicable law are paid
  3. Thirdly, in many legal systems, the claims of the holders of a floating charge will be paid; other claims may also fit into this layer[13]
  4. Fourthly, if there is anything left, the unsecured creditors are paid out pari passu in accordance with their claims. In many jurisdictions, a portion of the assets which would otherwise be caught by a floating charge are reserved for the unsecured creditors.[14]
  5. In the very rare instances where the unsecured creditors are repaid in full, any surplus assets are distributed between the members in accordance with their entitlements.

Unclaimed assets will usually vest in the state as bona vacantia. A preferential creditor (in some jurisdictions called a preferred creditor) is a creditor who receives a preferential right to payment upon the debtors bankruptcy under applicable insolvency laws. ... A floating charge is a security interest over all of the assets of a company which floats until an event of default is triggered or until the company goes into insolvent liquidation at which time the floating charge crystallises and attaches to all of the assets of the company. ... An unsecured creditor is a creditor which is not a preferential creditor and which does not have the benefit of any security interests over the assets of the debtor. ... pari passu is a Latin phrase that means at the same pace, and by extension also fairly, without partiality. In finance this term refers to two or more loans, bonds or series of preferred stock having equal rights of payment, i. ... Bona vacantia (Latin for vacant goods) is a common law doctrine in the United Kingdom under which ownerless property passes by law to the Crown. ...

See also: Secured creditor, Preferred creditor and Unsecured creditor

A secured creditor is a creditor which has the benefit of a security interest over some or all of the assets of the debtor. ... A preferential creditor (in some jurisdictions called a preferred creditor) is a creditor who receives a preferential right to payment upon the debtors bankruptcy under applicable insolvency laws. ... An unsecured creditor is a creditor which is not a preferential creditor and which does not have the benefit of any security interests over 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.[15]

See also: Dissolution (law)

Dissolution is also the term for the legal process by which an adoption is reversed. ...

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.[16]


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).[17]


See also

Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration—see text) in the United Kingdom. ... 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. ... Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States. ...

Footnotes

  1. ^ Those shareholders who may be required to contribute to the company's assets on liquidation, for example, in the United Kingdom, see sections 74 and 75 of the Insolvency Act 1986
  2. ^ In the United Kingdom, see section 122 of the Insolvency Act 1986
  3. ^ See Stonegate Securities Ltd v Gregory [1980] Ch 576
  4. ^ Ebrahimi v Westbourne Galleries [1972] 2 AER 492
  5. ^ Tay Bok Choon v Tahansan Sdn Bhd [1987] BCLC 472
  6. ^ Re A & BC Chewing Gum Ltd [1975] 1 WLR 579
  7. ^ In the United Kingdom, see section 129 of the Insolvency Act 1986
  8. ^ In the United Kingdom, see section 127 of the Insolvency Act 1986
  9. ^ In the United Kingdom, see section 130 of the Insolvency Act 1986
  10. ^ Re A Company (No 001573 of 1983) [1983] Com LR 202
  11. ^ See for example, Barclays Bank v Quistclose [1970] AC 56
  12. ^ Re Coregrange Ltd [1984] BCLC 453
  13. ^ For example, in the United Kingdom, the claims of persons who have distrained goods within the preceding three months are postponed to the preferred creditors, see section 176 of the Insolvency Act 1986
  14. ^ In the United Kingdom, 50% of the property up to £10,000 and 20% of further property, up to an aggregate maximum of £600,000 - The Insolvency Act 1986 (Prescribed Part) Order (No 2097 of 2003)
  15. ^ In the United Kingdom, see section 651 of the Companies Act 1986
  16. ^ In the United Kingdom, see section 652 and 653 of the Companies Act 1986
  17. ^ Re Priceland Limited [1997] 1 BCLC 467

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