Definition of liquidation
- IPA: /ˌlɪkwəˈdeɪʃən/, SAMPA: /%lIkw@"deIS@n/
- Rhymes: -eɪʃən
liquidation (plural liquidations)
- The process of converting into cash (or into an asset with high liquidity).
- The selling of the assets of a business as part of the process of dissolving the business.
The store is having a liquidation sale, everything must go as they go out of business.
In law, liquidation is 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 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.
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).
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:
- the company itself
- any creditor who establishes a prima facie case
- the Secretary of State (or equivalent)
- the Official Receiver
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 to compulsorily wind-up the company are:
- the company has so resolved
- the company was incorporated as a public company, and has not been issued with a trading certificate (or equivalent) within 12 months of registration
- it is an "old public company" (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
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 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, 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 property are generally void, and litigation 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 liquidator and possibly of supervisory liquidation committee.
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.
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 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.
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 (director limit $2000)
- Payments owing in respect of workers's injuries
- Amounts owing to employees for leave (director limit $1500)
- Retrenchment payments owing to employees
- Creditors with floating charge over assets
- Creditors without security over assets
Unclaimed assets will usually vest in the state as bona vacantia.
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