Liquidation is a process where the company’s assets are seized and realised, with the resulting proceeds used to pay off its debts and liabilities. The information below, unless otherwise stated, is largely applicable to the liquidation of a limited liability partnership. Show Any surplus is then distributed among the contributories of the company according to their rights and interests, or otherwise dealt with as the constitution of the company directs. Upon the completion of the liquidation, the company goes into dissolution and it ceases to exist. The purposes of a liquidation are:
Just distribution of assets When a company is being wound up, the company’s business ceases to operate and its assets and affairs are handed over to an independent liquidator whose powers, duties and functions are regulated by the Insolvency, Restructuring and Dissolution Act 2018. The rights of unsecured creditors over the company’s assets are virtually “frozen” upon the commencement of the liquidation to avoid a further deterioration of the company’s financial position and proliferation of its liabilities. Unsecured creditors are paid on a pari passu basis, i.e. they are paid out of the company’s assets equally. Any surplus is then distributed among the contributories of the company. Reasons for winding up a company
What are the various types of winding up? 1. Members’ voluntary winding up The company’s contributories (also known as members or shareholders) may pass a resolution that the company be wound up and that a liquidator be appointed. The liquidation commences at the time of passing the resolution. It is adopted where the company is able to pay its debts in full within 12 months after the commencement of winding up. The directors of the Company are required to file a declaration of solvency. 2. Creditors’ voluntary winding up If the company is not able to meet its liabilities, the company can convene a meeting with its creditors to consider its proposal for a voluntary winding up of the company. If a resolution is passed in favour of the winding up, the company will appoint a liquidator, subject to any preference the creditors may have as to the choice of liquidator. 3. Compulsory winding up Under section 124 of the Insolvency, Restructuring and Dissolution Act 2018, the company itself, creditors, contributories, liquidator, judicial manager or the Minister may present a winding up application to the High Court. The applicant has to pay a winding up deposit of $10,400 to the Official Receiver, and the Court may appoint the Official Receiver or an insolvency as the liquidator of the company. The winding up is deemed to have commenced as at the date of the presentation of the winding up application. Section 125 of the Insolvency, Restructuring and Dissolution Act 2018 states all the grounds under which the Court may liquidate a company. The common grounds for a company to be wound up by the Court include:
What are the stages involved in a compulsory liquidation? Click here to view the major stages involved in a compulsory liquidation. What effects does liquidation have on the company and creditors? a) Proceedings against the company An application may be made to the Court to stay or restrain pending proceedings against the company at any time after the presentation of a winding up application and before a winding up order has been made. No action or proceeding shall be proceeded with or commenced against the company except with the Court’s leave after a winding up order has been made. b) Disposition of company assets Any disposition or sale of the company’s assets, transfer of shares or alteration in the status of company’s contributories made after the commencement of the winding up by the Court is void without the Court’s sanction or approval. The Court may allow the disposal of property for continuation of business or in the ordinary course of business, which may be beneficial not only to the company but also to the unsecured creditors. For example, sale of assets at full market value may also be validated if the transaction does not involve dissipation of the company’s assets. A disposition or sale carried out in good faith in the ordinary course of business at a time when parties are unaware that a winding up application has been presented may be validated by the Court unless there were grounds for thinking that the transaction might involve an attempt to prefer the buyer. c) Execution proceedings After a winding up application has been presented, no creditor is allowed to take out or continue attachment or execution proceedings against the company. A creditor must complete execution before the winding up application has been presented. Otherwise, a creditor cannot retain the goods. For example, goods under a writ of seizure and sale must be seized and sold; garnishee proceedings are completed on receipt of the debt. Landlords may not distrain for rent after the winding up application has been presented. However, if distress proceedings are completed before that date, landlords are entitled to net proceeds of sale of up to 12 months’ rent. d) Floating charges A floating charge created in favour of a connected persion or any other persons within a period of 2 years or 1 year of the commencement of the winding up respectively, shall be invalid, except to the amount of cash paid to the company at the time of or subsequently to the creation of the charge, together with the interest (if any) pursuant to any agreement. The floating charge shall remain invalid unless the secured creditor is able to prove that the company was solvent after the creation of the floating charge. Any floating charge given by the company in the above periods will, unless the company was solvent immediately, be invalid except to the extent that it was given to secure new money. Even if the floating charge is invalid, the debt will remain as an unsecured debt. The proceeds of realisation of assets under a floating charge will first be used to pay certain priority claims in accordance with section 203 of the Insolvency, Restructuring and Dissolution Act 2018 before satisfying the claim of the lender secured by the floating charge. e) Secured creditors The rights of the secured creditor to deal or realise security over company assets are not affected by the winding up order. However the secured creditor is not entitled to interest on the debt if the security is not realised within 12 months of winding up or such further period as allowed by the Official Receiver. What is the role of a liquidator in compulsory liquidation? The powers of a liquidator for a compulsory winding up are set out in section 144 of the Insolvency, Restructuring and Dissolution Act 2018. The role of the liquidator includes the following:
a) Realisation of assets Company’s assets that may be realised by a liquidator include:
It must be noted that the liquidator shall not be liable to incur any expenses in relation to a winding up unless there are sufficient available assets. A creditors’ meeting may be convened for the purpose of obtaining the creditors’ consent to pursue a claim that is worth pursuing and to meet the expenses of pursuing such a claim. Such claims would include undertaking legal proceedings for recovery of moneys. b) Prosecution of company officers Apart from the prosecution of directors or officers who fail to file the Statement of Affairs, delinquent directors and officers of the company in winding up can also be held liable for a range of offences including falsification of books, failure to keep proper accounts and fraudulent trading. In addition, delinquent officers can also be made personally liable in damages for misfeasance or breach of trust against the company on the application of the liquidator to the Court for assessment of damages against guilty officers, and the Court may also direct that prosecution be instituted for any criminal liability on the part of the officers found liable. c) Adjudication and admission of claims of the creditors Creditors may file their Proofs of Debt with the liquidator once the company is in liquidation. The claims are then adjudicated and admitted or rejected accordingly. If any claim is rejected either in part or in whole, the liquidator will send a notice of rejection to the creditor, stating his reasons for the rejection. Any creditor who is dissatisfied with the liquidator’s decision may appeal to the Court to set aside the liquidator’s decision. d) Distribution of assets The proceeds from the realisation of the company’s assets will first be paid to the preferential creditors as set out in section 203 of the Insolvency, Restructuring and Dissolution Act 2018 in the following order:
^ Subject to caps as stated in the relevant provisions. After payment of these preferential claims in full, the balance is then paid pari passu (i.e. paid out equally) to all ordinary creditors. When all creditors have been paid, the liquidator makes a capital repayment to shareholders with the leave of Court. The shareholders are paid in proportion to their respective interests in the company’s share capital. e) Release and dissolution Upon the completion of the liquidation, the liquidator applies to the Court for the company to be dissolved and to be released as liquidator where it discharges the liquidator from all liability in respect of his conduct in the course of winding up. Any assets that were not realised prior to dissolution will vest with the Official Receiver under section 213 of the Insolvency, Restructuring and Dissolution Act 2018. The Official Receiver may deal with these assets in any manner as he sees fit including selling the property. Is liquidation the same as dissolution?The quick answer
Liquidate means a formal closing down by a liquidator when there are still assets and liabilities to be dealt with. Dissolving a company is where the business is struck off the register at Companies House because it is now inactive. The two are very different processes.
Is partnership dissolution is synonymous with partnership liquidation?Recording the Dissolution Process
As discussed above, the liquidation or dissolution of a partnership is synonymous with closing the business. This may occur due to mutual partner agreement to sell the business, the death of a partner, or bankruptcy.
What is partnership dissolution with liquidation?Definition: Partnership liquidation is the process of closing the partnership and distributing its assets. Many times partners choose to dissolve and liquidate their partnerships to start new ventures. Other times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors.
Does liquidation mean dissolution?Liquidation is also referred to as dissolution and the terms are used interchangeably, but technically they describe different actions and their meaning is not the same. In other words, liquidation is seen as a last legal resort for a stressed company, while dissolution is the first step in closing a business.
|
