Liquidation is the process in accounting by which a company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as wound-up or dissolved, 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.19 CFR §159.1.
Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation or receivership following bankruptcy, which may result in the court creating a "liquidation trust"; or sometimes a court can mandate the appointment of a liquidator e.g. wind-up order in Australia) or voluntary (sometimes referred to as a shareholders' liquidation or members' liquidation, although some voluntary liquidations are controlled by the creditors).
The term "liquidation" is also sometimes used informally to describe a company seeking to divestment 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. A company may also operate in a "receivership-like" state but calmly sell its assets, for example to prevent its portfolio being written off in the event of an actual compulsory liquidation.
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.See Stonegate Securities Ltd v Gregory 1980 Ch 576, per Buckley L.J. at 579.
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, Ebrahimi v Westbourne Galleries 1972 2 AER 492. or of an implied obligation to participate in management. Tay Bok Choon v Tahansan Sdn Bhd 1987 BCLC 472. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director. Re A & BC Chewing Gum Ltd 1975 1 WLR 579.
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. Re A Company (No 001573 of 1983) 1983 Com LR 202.
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.
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. 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 Solvency, 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.
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.
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 law for third parties will not form part of the company's assets available to pay creditors.See for example, Quistclose trust 1970 AC 56.
Before the claims are met, 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. Re Coregrange Ltd 1984 BCLC 453.
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:
Unclaimed assets will usually vest in the state as bona vacantia.
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). Re Priceland Limited 1997 1 BCLC 467.
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.