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Liquidation is the process in accounting by which a
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
is brought to an end in
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,
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, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when
customs Customs is an authority In the fields of sociology Sociology is a social science that focuses on society, human social behavior, patterns of Interpersonal ties, social relationships, social interaction, and aspects of culture associa ...
, an
authority In the fields of sociology Sociology is a social science that focuses on society, human social behavior, patterns of Interpersonal ties, social relationships, social interaction, and aspects of culture associated with everyday life. It use ...
or agency in a
country A country is a distinct part of the world, such as a state (polity), state, nation, or other polity, political entity. It may be a sovereign state or make up one part of a larger state. For example, the country of Japan is an independent, so ...
responsible for collecting and safeguarding
customs duties A tariff is a tax imposed by the government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of le ...
, 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 ''receivership'' following
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debt ...
, which may result in the court creating a "liquidation trust") or voluntary (sometimes referred to as a ''shareholders' liquidation'', although some voluntary liquidations are controlled by the creditors). The term "liquidation" is also sometimes used informally to describe a company seeking to divest of some of its assets. For instance, a
retail chain A chain store or retail chain is a retail outlet in which several locations share a brand, Management, central management and standardized business practices. They have come to dominate the retail and dining markets and many service categories, ...
may wish to close some of its stores. For efficiency's sake, it will often sell these at a discount to a company specializing in
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
liquidation instead of becoming involved in an area it may lack sufficient expertise in to operate with maximum profitability.


Compulsory liquidation

The parties which are entitled by law to
petition A petition is a request to do something, most commonly addressed to a government official or public entity. Petitions to a deity are a form of prayer called supplication. In the colloquial sense, a petition is a document addressed to some offici ...
for the compulsory liquidation of a company vary from
jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. Jur ...
to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by: * The company itself * Any
creditor A creditor or lender is a Party (law), party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided s ...
which establishes a ''
prima facie ''Prima facie'' (; ) is a List of Latin phrases, Latin expression meaning ''at first sight'' or ''based on first impression''. The literal translation would be 'at first face' or 'at first appearance', from the feminine forms of ''primus'' ('fir ...
'' case * Contributories: Those shareholders be required to contribute to the company's
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s on liquidation * A
government minister A minister is a politician who heads a ministry (government department), ministry, making and implementing decisions on policies in conjunction with the other ministers. In some jurisdictions the head of government is also a minister and is desi ...
, usually the one responsible for competition and business * An
official receiver An officer of the Insolvency Service of the United Kingdom, an official receiver (OR) is an officer of the court to which they are attached. The OR is answerable to the courts for carrying out the courts' orders and for fulfilling their duties ...


Grounds

The grounds upon which an entity can apply to the court for an order of compulsory liquidation also vary between
jurisdictions Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. J ...
, but normally include: * The company has so resolved * The company was incorporated as a
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...
, and has not been issued with a trading certificate (or equivalent) within 12 months of registration * It is an "old
public company A public company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock exchange or in Over-the-counter (finance), over-the-counter markets. A public (publicly traded) comp ...
" (i.e. one that has not re-registered as a public company or become a private company under more recent companies legislation requiring this) * 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 * The number of members has fallen below the minimum prescribed by statute * The company is unable to pay its debts as they fall due * It is just and equitable to wind up the company, as for an example specified by an Insolvency Act 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 enables the grounds 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 generally void, and
litigation - A lawsuit is a proceeding by a party or parties against another in the Civil law (common law), civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in re ...
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 a liquidator and possibly of a supervisory liquidation committee.


Administrative Receiver

The person appointed by the holder of a floating charge debenture over a company’s assets to collect in and realise the assets of that company and to repay the indebtedness to the debenture holder.


Voluntary liquidation

Voluntary liquidation occurs when the members of a company resolve to voluntarily wind up its affairs 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). A creditors’ voluntary liquidation (CVL) is a process designed to allow an
insolvent In accounting, insolvency is the state of being unable to pay the debts, by a Natural person, person or company (debtor), at Maturity (finance), maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: Cash flow ...
company to close voluntarily. The decision to liquidate is made by a board resolution, but instigated by the director(s). 75 percent of the company's shareholders must agree to liquidate for liquidation proceedings to advance. If a limited company’s liabilities outweigh its assets, or the company cannot pay its bills when they fall due, the company becomes insolvent. If the company is
solvent A solvent (s) (from the Latin language, Latin ''wikt:solvo#Latin, solvō'', "loosen, untie, solve") is a substance that dissolves a solute, resulting in a Solution (chemistry), solution. A solvent is usually a liquid but can also be a solid, a ...
, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary liquidation (MVL). In that case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditors' voluntary liquidation, and a meeting of creditors will be called, to which the directors must report on the company's affairs. Where a voluntary liquidation proceeds as a creditors' 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 contributors.


Misconduct

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 is a type of civil wrong found in UK insolvency law, under Section 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 inso ...
or fraudulent trading. 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.


Priority of claims

The main purpose of a liquidation where the company is insolvent is to collect its 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 for third parties will not form part of the company's assets available to pay creditors. 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 finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''Collateral (finance), collateral'') which enables the creditor to have recourse to the property if the deb ...
. In most legal systems, only fixed security takes precedence over all claims; security by way of floating charge may be postponed to the preferential creditors. 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 is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. It is typically available in the sale of land law, b ...
, 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: # Liquidators costs # Creditors with fixed charge over assets # Costs incurred by an administrator # Amounts owing to employees for wages/superannuation # Payments owing in respect of worker's injuries # Amounts owing to employees for leave # Retrenchment payments owing to employees # Creditors with floating charge over assets # Creditors without security over assets # Shareholders ( Liquidating distribution) Unclaimed assets will usually vest in the state as '' bona vacantia''.


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 common 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 companies register as a cheaper alternative to a formal winding-up and dissolution. In such cases an application is made to the registrar of companies, who 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 will strike the company off the register.


Provisional liquidation

Under the corporate insolvency laws of a number of common law jurisdictions, where a company has been engaged in misconduct or where the assets of the company are thought to be in jeopardy, it is sometimes possible to put a company into provisional liquidation, whereby a liquidator is appointed on an interim basis to safeguard the position of the company pending the hearing of the full winding-up petition. The duty of the provisional liquidator is to safeguard the assets of the company and maintain the status quo pending the hearing of the petition; the provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors.


Phoenix companies

In the UK, many companies in
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The de ...
decide it is 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 may appear ideal for the directors; however, if they trade under a name which is the same or substantially the same as the company in liquidation without approval from the Court, they will be committing an offence under §216 of the
Insolvency Act 1986 The Insolvency Act 1986c 45 is an Act of Parliament, Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK. History The Insolvency Act 1986 followed t ...
(and equivalent legislation in UK regions). Persons participating in the management of the 'phoenix' company may also be held personally liable for the debts of the company under §217 of the Insolvency Act unless the Court approval has been granted.


See also

*
Bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debt ...
*
Chapter 7, Title 11, United States Code Chapter 7 of Title 11 of the United States Code (Bankruptcy Code) governs the process of liquidation under the bankruptcy laws of the United States, in contrast to Chapters Chapter 11, Title 11, United States Code, 11 and Chapter 13, Title 11, Un ...
* Debtor-in-possession financing * Estate liquidation *
Liquidating dividend A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation. Liquidating distributions are not paid solely out of th ...
* Pre-pack administration


References

{{Authority control Bankruptcy Corporate law Insolvency Corporate liquidations es:Sociedad mercantil#Disolución y liquidación de las sociedades mercantiles no:Likvidasjon pl:Postępowanie upadłościowe