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Liquidation is the process in accounting by which a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common pu ...
is brought to an end in
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Canada
,
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
,
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
,
Ireland Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic. It is separated from Great Britain to its east by the North Channel (Great Britain and Ireland), North Channel, the Irish Sea ...

Ireland
,
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Australia
,
New Zealand New Zealand ( mi, Aotearoa ''Aotearoa'' (; commonly pronounced by English English usually refers to: * English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon Engl ...

New Zealand
,
Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of a peninsula delimited by the Alps The Alps ; german: Alpen ; it, Alpi ; rm, Alps; sl, Alpe ) are the highest ...

Italy
, 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 Dissolution may refer to: Arts and entertainment Books * Dissolution (Forgotten Realms novel), ''Dissolution'' (''Forgotten Realms'' novel), a 2002 fantasy novel by Richard Lee Byers * Dissolution (Sansom novel), ''Dissolution'' (Sansom novel), a 2 ...
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 the study of society, human social behaviour, patterns of social relationships, social interaction, and culture that surrounds everyday life. It is a social science that u ...

customs
, an
authority In the fields of sociology Sociology is the study of society, human social behaviour, patterns of social relationships, social interaction, and culture that surrounds everyday life. It is a social science that uses various methods of Empiric ...

authority
or
agency Agency may refer to: * a governmental or other institution Institutions, according to Samuel P. Huntington, are "stable, valued, recurring patterns of behavior". Institutions can refer to mechanisms which govern the behavior Behavior (Am ...
in a
country A country is a distinct territorial body or political entity A polity is an identifiable political entity—any group of people who have a collective identity, who are organized by some form of Institutionalisation, institutionalized social ...

country
responsible for collecting and safeguarding
customs duties Customs is an authority In the fields of sociology Sociology is the study of society, human social behaviour, patterns of social relationships, social interaction, and culture that surrounds everyday life. It is a social science that uses ...
, 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 creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' par ...

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). The term "liquidation" is also sometimes used informally to describe a company seeking to
divest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...
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 categorie ...
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 genera ...
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 A deity or god is a supernatural being considered divinity, divine or sacred. The ''Oxford Dictionary of English'' ...

petition
for the compulsory liquidation of a company vary from
jurisdiction Jurisdiction (from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be i ...
to
jurisdiction Jurisdiction (from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be i ...
, 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 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...

creditor
which establishes a ''
prima facie ''Prima facie'' (; ) is a 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'' ('first') and ''facies'' ('f ...
'' case * Contributories: Those shareholders be required to contribute to the company's
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
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 desig ...
, usually the one responsible for competition and business * An official receiver


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 ''Wikt:ius#Latin, juris'' 'law' + ''Wikt:dictio, dictio'' 'declaration') is the legal term for the authority granted to a legal entity to enact justice. Colloquially it is used to refer to the geographical area (: locatio ...
, 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 ...

corporation
, 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, publicly traded company, publicly held company, publicly listed company, or public limited company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock ...
" (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 Void may refer to: Science, engineering, and technology * Void (astronomy) Cosmic voids are vast spaces between filaments (the largest-scale structures in the universe The universe ( la, universus) is all of space and time and their c ...
, and
litigation A lawsuit is a proceeding by a party or parties against another in the civil Civil may refer to: *Civic virtue, or civility *Civil action, or lawsuit *Civil affairs *Civil and political rights *Civil disobedience *Civil engineering *Civil ...
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
insolventInsolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet insolvency. Cash-flow i ...
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 (from the Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the ...
, 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 insolv ...
or
fraudulent trading In company law, fraudulent trading is doing business with intent to defraud creditors. Law Where during the course of a Liquidation, winding-up, it appears to the liquidator that fraudulent trading has occurred, the liquidator may apply to the cour ...
. The liquidator may also have to determine whether any payments made by the company or transactions entered into may be
voidable Voidable, in law, is a transaction or action that is valid but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ''ab initio'' (or void from the outset) and unenforceable. Definition The act ...
as a transaction at an undervalue or an
unfair preference Unfair may refer to: * The negative form of the adjective ''wikt:fair, fair''; wikt:unfairness, unfairness or injustice * Unfair (TV series), ''Unfair'' (drama), Japanese television series * ''Unfair: The Movie'' * Unfair (song), a song by South Kor ...
.


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 clauseA retention of title clause (also called a ''Romalpa'' clause in some jurisdictions) is a provision in a contract for the sale of goods that the title to the goods remains vested in the seller until the buyer fulfils certain obligations (usually paym ...
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 creditor A secured creditor is a creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have bee ...
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 In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
. In most legal systems, only fixed security takes precedence over all claims; security by way of
floating charge A floating charge is a security interest 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'') which enables the creditor to have recourse to the property if ...
may be postponed to the
preferential creditor A preferential creditor (in some jurisdiction Jurisdiction (from Latin ''Wikt:ius#Latin, juris'' 'law' + ''Wikt:dictio, dictio'' 'declaration') is the practical authority granted to a legal body to administer justice, as defined by the kind of ...
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 is an equitable remedyEquitable remedies are judicial remedies developed by courts of Equity (law), equity from about the time of Henry VIII of England, Henry VIII to provide more flexible responses to changing social condition ...
, 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 Unowned property refers to tangible, physical things which are capable of being reduced to being property Property (''latin: Res Privata'') in the Abstract and concrete, abstract is what belongs to or with something, whether as an attribute or as ...
''.


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 Provisional liquidation is a process which exists as part of the insolvency, 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 cour ...
, 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 A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

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 The Insolvency Act 1986c 45 is an Act of the Parliament of the United Kingdom The Parliament of the United Kingdom is the supreme legislative body A legislature is an assembly Assembly may refer to: Organisations and meetings * Delib ...
(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 creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' par ...

Bankruptcy
*
Chapter 7, Title 11, United States Code Chapter 7 of Title 11 of the United States Code (Bankruptcy Code) governs the process of liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity represe ...
*
Debtor-in-possession financingDebtor-in-possession financing or DIP financing is a special form of financingFunding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time fr ...
* Estate liquidation *
Liquidating dividendA liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholder A shareholder (in the United States often referred to as stockholder) of a corporation A cor ...
* 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