LIQUIDATION

DEFINITION OF LIQUIDATION

Termination oI a business operation by using its assets to discharge its
liabilities Occurs when a Iirm's business is terminated Assets are sold
proceeds are used to pay creditors, and any leItovers are distributed to
shareholders.
Liquidation
1. When a business or Iirm is terminated or bankrupt, its assets are sold
and the proceeds pay creditors.
Definition of liquidation: Winding up oI a Iirm by selling oII its Iree
(un-pledged) assets to convert them into cash to pay the Iirm's unsecured
creditors.
What are the different types of liquidation?
The law classiIies liquidations into two types: voluntary (which is by a
shareholders` resolution) or compulsory (by a court order).
Liquidations are also classiIied according to whether the company is
solvent or insolvent.
Solvent and insolvent liquidations
II the company is insolvent, this means it is unable to pay its debts as
they Iall due. In this situation there is potential conIlict between
creditors (those to whom money is owed), as there will be insuIIicient
assets Ior all creditors to be paid in Iull.
The law attempts to maintain equality between creditors, so the assets
are distributed proportionately according to the size oI each creditor`s
claim. However, the law gives priority to secured creditors (those with a
charge over some oI the company`s property as security Ior the debt). In
addition, a number oI rules exist to prevent one or more creditors Irom
gaining an unIair advantage.
'oluntary liquidation (by shareholders` resolution)
Voluntary liquidation reIers to the process whereby the shareholders
appoint a liquidator, who is then answerable to the creditors or
shareholders. It is not necessary to make any application to the court Ior
this; however, the liquidator may apply to the court Ior directions and
the court has power to remove a liquidator.
A voluntary liquidation may also by commenced by the board oI
directors iI an event speciIied in the company`s constitution has
occurred.
Voluntary liquidation may be in one oI two Iorms, depending on
whether or not the company is solvent. II the company is solvent the
shareholders can supervise the liquidation. However, iI the company is
insolvent, the creditors may take control oI the liquidation process by
applying to the court. The court will require prooI oI solvency or
insolvency to determine this matter.
Compulsory liquidation (by court order)
Compulsory liquidation oI a company requires obtaining a court order.
This process starts with an application to the court alleging that one or
more oI the required grounds exist. The application may be brought by
the company or a majority oI its directors, or by the Registrar oI
Companies, or by a creditor. Applications by creditors are by Iar the
most important and common.
Applications may be brought on a number oI grounds, the most
important being that the company is unable to pay its debts. There are a
number oI Iactors that the court will take into account when deciding
whether or not to make a compulsory liquidation order. The court has
discretion as to whether or not to make the order.
The procedure for liquidation
Broadly speaking, the liquidation process is as Iollows:
O A liquidator is appointed, either by the company shareholders
passing a resolution (voluntary liquidation) or by the Court making
an order (compulsory liquidation).
O The liquidator collects the assets oI the company (including
uncalled capital; that is, amounts unpaid on shares) and pays the
creditors in order oI priority.
O The liquidator distributes any surplus Iunds to the shareholders.
O The company is then Iormally dissolved.
What are the consequences of liquidating a company?
The main consequences oI the company being liquidated are as Iollows:
O The company no longer has the power to dispose oI its property.
O The company may carry on business only Ior the limited purpose
oI completing the liquidation process.
O The powers oI the company directors come to an end when a
liquidator is appointed.
O A liquidation order operates as a notice oI dismissal to all oI the
company`s employees. Note, however, that iI an employee is on a
Iixed-term contract and is required under this contract to be given a
period oI notice, then a liquidation order will breach this and the
employee will be entitled to damages.
O When an application is made Ior a court-ordered liquidation, the
court may stay or restrain any proceedings against the company as
the court sees Iit. When a liquidator is appointed, no person can
begin or continue legal proceedings against the company or in
relation to its property, unless the liquidator agrees or the court
permits it.
For Example
Canadian discount airline, Jets go in2005, halted operations, Iiled Ior
bankruptcy, and then liquidated. Canada third airline, hats go was
launched three years earlier Irom Montreal. Jets go competed against
west jet, based in Calgary, Alberta, and air Canadian, based in Montreal.
Analysis had long predicted that jets go would Iail, given the company`s
rock bottom ticket prices and aggressive expansion.
Thousand oI small business in the United States liquidated annually
without ever making the news. It is tough to start and successIully
operate a small business. In china and Russia thousand oI government
owned business liquidates annually as those countries try to privatized
and consolidate industries.