Liquidation

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Liquidation is the process in accounting by which a company is brought to an end in the United Kingdom, Australia, Republic of Ireland, Cyprus and United States. 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, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry. [1]

United Kingdom Country in Europe

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a sovereign country located off the north-western coast of the European mainland. The United Kingdom includes the island of Great Britain, the north-eastern part of the island of Ireland, and many smaller islands. Northern Ireland is the only part of the United Kingdom that shares a land border with another sovereign state, the Republic of Ireland. Apart from this land border, the United Kingdom is surrounded by the Atlantic Ocean, with the North Sea to the east, the English Channel to the south and the Celtic Sea to the south-west, giving it the 12th-longest coastline in the world. The Irish Sea lies between Great Britain and Ireland. The United Kingdom's 242,500 square kilometres (93,600 sq mi) were home to an estimated 66.0 million inhabitants in 2017.

Australia Country in Oceania

Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. It is the largest country in Oceania and the world's sixth-largest country by total area. The neighbouring countries are Papua New Guinea, Indonesia, and East Timor to the north; the Solomon Islands and Vanuatu to the north-east; and New Zealand to the south-east. The population of 25 million is highly urbanised and heavily concentrated on the eastern seaboard. Australia's capital is Canberra, and its largest city is Sydney. The country's other major metropolitan areas are Melbourne, Brisbane, Perth, and Adelaide.

Republic of Ireland Country in Europe on the island of Ireland

Ireland, also known as the Republic of Ireland, is a country in north-western Europe occupying 26 of 32 counties of the island of Ireland. The capital and largest city is Dublin, which is located on the eastern side of the island. Around a third of the country's population of 4.8 million people resides in the greater Dublin area. The sovereign state shares its only land border with Northern Ireland, a part of the United Kingdom. It is otherwise surrounded by the Atlantic Ocean, with the Celtic Sea to the south, St George's Channel to the south-east, and the Irish Sea to the east. It is a unitary, parliamentary republic. The legislature, the Oireachtas, consists of a lower house, Dáil Éireann, an upper house, Seanad Éireann, and an elected President who serves as the largely ceremonial head of state, but with some important powers and duties. The head of government is the Taoiseach, who is elected by the Dáil and appointed by the President; the Taoiseach in turn appoints other government ministers.

Contents

Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation following bankruptcy, 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).

Bankruptcy legal status of a person or other entity that cannot repay the debts it owes to creditors

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 debtor.

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 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 liquidation instead of becoming involved in an area it may lack sufficient expertise in to operate with maximum profitability.

Divestment reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm

In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.

When liquidation occurs the company does not have the power to dispose of its property. It only remains operational in order to complete the liquidation. The liquidator has the power of the company and company employees are dismissed. If it is a court-ordered liquidation, the court has the choice to stay or restrain any proceedings against the company when required. [2]


Compulsory liquidation

The parties which 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:

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.

A creditor is a party 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 some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

Prima facie is a Latin expression meaning on its first encounter or at first sight. The literal translation would be "at first face" or "at first appearance", from the feminine forms of primus ("first") and facies ("face"), both in the ablative case. In modern, colloquial and conversational English, a common translation would be "on the face of it". The term prima facie is used in modern legal English to signify that upon initial examination, sufficient corroborating evidence appears to exist to support a case. In common law jurisdictions, prima facie denotes evidence that, unless rebutted, would be sufficient to prove a particular proposition or fact. The term is used similarly in academic philosophy. Most legal proceedings, in most jurisdictions, require a prima facie case to exist, following which proceedings may then commence to test it, and create a ruling.

An officer of the Insolvency Service of the United Kingdom, an official receiver (OR) is an officer of the court to which he is attached. The OR is answerable to the courts for carrying out the courts' orders and for fulfilling his duties under law. He also acts on directions, instructions and guidance from the service's Inspector General or, less often, from the Secretary of State for Business, Energy and Industrial Strategy.

Grounds

The grounds upon which an entity can apply to the court for an order of compulsory liquidation also vary between jurisdictions, but normally include:

In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds. [6]

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. [7]

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, [8] or of an implied obligation to participate in management. [9] An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director. [10]

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), [11] dispositions of the company's property are generally void, [12] and litigation involving the company is generally restrained. [13]

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. [14]

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.

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). [15]

A creditors’ voluntary liquidation (CVL) is a process designed to allow an insolvent 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. [16] 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, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary winding-up. In that case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditors' 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 as a creditors' voluntary liquidation, a liquidation committee may be appointed. [17]

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 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. [18]

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 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, and compel the liquidator to transfer title to the land to them, upon tender of the purchase price. [19]

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
  5. Payments owing in respect of workers's injuries
  6. Amounts owing to employees for leave
  7. Retrenchment payments owing to employees
  8. Creditors with floating charge over assets
  9. Creditors without security over assets
  10. 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. [20]

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. [21] [22]

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). [23]

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. [24] 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. [25]

Phoenix companies

In the UK, many companies in debt 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 (and equivalent legislation in UK regions). [26] 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. [27]

See also

Related Research Articles

A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for directors to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.

Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

Insolvency Act 1986 United Kingdom legislation

The Insolvency Act 1986 is an 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.

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 insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".

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 under such circumstances of the company and settling all claims against the company before putting the company into dissolution.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called "under administration" – is an alternative to liquidation, or may be a precursor to it. Administration is commenced by an administration order. A company in administrative receivership is operated by an administrator on behalf of its creditors. The administrator may recapitalize the business, sell the business to new owners, or demerge it into elements that can be sold and close the remainder. Most countries distinguish between voluntary (board-decided) and involuntary (court-decided) receivership. In voluntary administrative receivership, the administrator is appointed by the company directors. In involuntary administrative receivership, the administrator is appointed by a judicial court. The legal terms for these processes vary from country to country, and the processes may overlap.

United Kingdom insolvency law

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986 ), the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

Liquidation is the process by which companies are wound-up, bringing their life to an end. The liquidator is the person appointed to supervise and implement the company's winding up.

<i>Re Anglo-Austrian Printing & Publishing Union</i>

Re Anglo-Austrian Printing & Publishing Union [1895] 2 Ch 891 is a UK insolvency law and company law case, concerning recovery of assets under a misfeasance action. It was held that because the claims were vested in the company before the company went into liquidation, the proceeds of such a claim would be caught by a floating charge where the floating charge was expressed to include any after-acquired property.

<i>Winding-up and Restructuring Act</i>

The Winding-up and Restructuring Act ("WURA") is a statute of the Parliament of Canada that provides for the winding up of certain corporations and the restructuring of financial institutions. It was passed in 1985, and has been amended since. Predecessors of the act date back to 1882.

<i>Buchler v Talbot</i>

Buchler v Talbot[2004] UKHL 9 is a UK insolvency law case, concerning the priority of claims in a liquidation. Under English law at the time the expenses of liquidation took priority over the preferred creditors, and the preferred creditors took priority over the claims of the holder of a floating charge. However, a crystallised floating charge theoretically took priority over the liquidation expenses. Accordingly the courts had to try and reconcile the apparent triangular conflict between priorities.

British Virgin Islands bankruptcy law

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Cayman Islands company law National economic law

Cayman Islands company law is primarily codified in the Companies Law and the Limited Liability Companies Law, 2016, and to a lesser extent in the Securities and Investment Business Law. The Cayman Islands is a leading Offshore financial centre, and financial services forms a significant part of the economy of the Cayman Islands. Accordingly company law forms a much more prominent part of the law of the Cayman Islands than might otherwise be expected.

Cayman Islands bankruptcy law

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Anguillan bankruptcy law

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

Hong Kong insolvency law

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

<i>Ayerst (Inspector of Taxes) v C&K (Construction) Ltd</i>

Ayerst v C&K (Construction) Ltd [1976] AC 167 was a decision of the House of Lords relating to revenue law and insolvency law which confirmed that where a company goes into insolvent liquidation it ceases to be the beneficial owner of its assets, and the liquidator holds those assets on a special "statutory trust" for the company's creditors.

References

  1. 19 CFR §159.1
  2. "How To Liquidate Your Company". Michaels Global Trading. Retrieved 2019-08-08.
  3. "Insolvency Act 1986: Section 74". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  4. "Insolvency Act 1986: Section 75". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  5. "Insolvency Act 1986: Section 122". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  6. Jefferson, Mark. "What is a Winding-Up Order". Business Recovery. Retrieved 16 December 2013.
  7. See Stonegate Securities Ltd v Gregory [1980] Ch 576, per Buckley L.J. at 579
  8. Ebrahimi v Westbourne Galleries [1972] 2 AER 492
  9. Tay Bok Choon v Tahansan Sdn Bhd [1987] BCLC 472
  10. Re A & BC Chewing Gum Ltd [1975] 1 WLR 579
  11. "Insolvency Act 1986: Section 129". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  12. "Insolvency Act 1986: Section 127". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  13. "Insolvency Act 1986: Section 130". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  14. Re A Company (No 001573 of 1983) [1983] Com LR 202
  15. "Liquidate your limited company". Gov.uk. Crown. Retrieved 30 July 2014.
  16. Clay, Andy (6 January 2017). "How to Liquidate in the UK". Company Help. Retrieved 7 April 2017.
  17. "Liquidation". Australian Securities & Investments Commission. Retrieved 30 July 2014.
  18. See for example, Barclays Bank v Quistclose [1970] AC 56
  19. Re Coregrange Ltd [1984] BCLC 453
  20. "Companies Act 1985: Section 651". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  21. "Companies Act 1985: Section 652". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  22. "Companies Act 1985: Section 653". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  23. Re Priceland Limited [1997] 1 BCLC 467
  24. "Provisional liquidation: a quick guide". Practical Law. Retrieved 30 July 2015.
  25. "Provisional Liquidation". Worrells. 25 September 2013. Retrieved 30 July 2015.
  26. "Insolvency Act 1986: Section 216". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  27. "Insolvency Act 1986: Section 217". legislation.gov.uk. Crown. Retrieved 30 July 2014.
  28. Steven N. Taieb (2014), Filing for bankruptcy, archived from the original on 18 April 2014, retrieved 18 April 2014