Reorganization and Liquidation of a Company

Liquidation of a company

A firm goes through a liquidation when it becomes insolvent, or when it is unable to make its debt payments when they become due. The corporation ceases to operate, and its assets are distributed to owners and creditors in accordance with the order of priority of their claims. When a company is insolvent, the process of liquidation entails selling off all of its assets, distributing any proceeds to shareholders, paying off its debts, and dissolving the business as a whole. A corporation may experience loss and go through the liquidation process if it runs out of money to pay its creditors (liabilities exceed assets). An involuntary or voluntary liquidation is possible (compulsory). A petition to liquidate a company can be made to the applicable court by creditors who have not been paid by the company. If granted by the court, the business will involuntarily enter to failure.

There are two types of liquidation:

• Compulsory liquidation:
  • A corporation may be forced to liquidate itself by order of the company registrar. The following scenario will result in the company's forced liquidation:
    • If the statutory report is not submitted on time to the registrar.
    • If the company does not start operating after being incorporated within a year.
    • If there are fewer than seven shareholders.
    • If the registrar office does not get the audit reports.
    • If the annual meeting statement is not delivered to the registrar's office.
    • If conducting business there is against the law.
    • If the office has grounds to suspect that the company is not conducting business or is not in a condition to do so.
    • If the company may fill petition to be wound up by the court.
• Voluntary liquidation: 
  • ​​​​​​​​​​​​​​A firm may enter into voluntary liquidation by special resolution of the general meeting. The following situations may result in voluntary liquidation:
    • In the company's articles and memoranda, it is stated what happens once the specified period has passed.
    • If the company's liabilities are greater than its assets.
    • If the business experiences losses on a consistent basis for a number of years.
    • If there is another reason the company needs to be dissolved.

Right of liquidator:

• To file a lawsuit on the company's behalf or to intervene in its defense.
• Make a call on any shares that aren't fully paid up, then pay out the company's obligations and liabilities.
• If necessary, to put all of the company's moveable and immovable assets up for auction or sale.
• Promissory notes and bills of exchange may be issued, approved, or endorsed in the company's name.
• To pay off the creditor's loans.
• He has the right, with the previous agreement of the office, to mortgage the company's assets in order to cover the costs paid during the liquidation.
• To come to an agreement with the individual submitting a claim as a creditor.
• Utilize the staff that is required to assist him if necessary.
• He/she has right to claim for remuneration after completion of the liquidation of the company.
• He/she has right to take custody of all of the books of account records and asses to which the company has its title.

Duties of liquidator

• Duties of notice:
  • Giving notice of his appointment as liquidator is the first task given to the liquidator. It states that in cases where a person other than the Official Receiver is named as the liquidator, that person will not be authorized to act in that capacity until he or she has notified the Registrar of their appointment and provided enough security, if any, for the proper discharge of their duties. In a voluntary winding up, the liquidator must also provide a notification of his appointment to the Registrar for registration within fourteen days of his appointment. All letters, invoices, and orders must also state that the company is in liquidation.
• Duty to keep certain financial and administrative records:
  • The liquidator is required to maintain accurate administrative and financial records in his or her books. According to Section 240, the liquidator in a compulsory winding up is required to maintain proper books in which he is to record all meeting time and any other subject matters that may be required by the Court or Act. Any creditor or contributory subject under the Court's control may also examine these books.
• Duty to hold certain meetings:
  • Liquidators in a voluntary liquidation are required to call a general meeting of the company if the winding up lasts longer than a year. They are also required to call a general meeting of the company every subsequent period of 12 months, at the first favorable date within three months of the end of the period of twelve months, or within such longer period as the Registrar may allow. At this meeting, the liquidator is required to give an account of his actions and make recommendations to the shareholders.
• Duty to provide information:
  • This obligation is due to the Registrar in cases where the winding up lasts longer than a year, the Official Receiver, and the creditors and donors. Creditors and contributors are to be updated on the status of the winding up process by the liquidators. A number of meetings must be held in order to accomplish this. We have observed that the liquidator is required to hold meetings both at the start and the end of the liquidation operation. Additionally, if a voluntary winding up takes longer than a year to accomplish, a meeting must be conducted. Meeting requests can come from both creditors and contributors. However, this general power is accessible only in case of a Compulsory winding up and may be exercised when the creditors or contributors so resolve or where the request is made in written by one-tenth in value of the creditors and contributors.
• Duty to examine the conduct of officers of the company:
  • When a liquidator is appointed, it is their responsibility to look into the past and present behavior of the company's officers and determine whether any wrongdoing in how they handled business has occurred. All executives of the company are required to notify the liquidator of any pertinent issues, and in the event that they fail to do so, they will be in violation of the law. The liquidator may obtain any information that he reasonably needs in the course of winding up the firm.
• Duty to get in and distribute the property of the company:
  • The recovery and realization of the assets is the liquidator's primary responsibility, and all of his powers must be used to effectively carry out this job. The company's assets must be recovered by the liquidator for the benefit of the creditors and ultimately the shareholders and he must realize the same so as to provide the best possible distribution.

References:

lawteacher.net. (n.d.). Retrieved from http://www.lawteacher.net/: http://www.lawteacher.net/free-law-essays/business-law/duties-and-obligations-of-a-liquidator-business-law-essay.php

out-law. (2011). Retrieved from out-law.com: http://www.out-law.com/topics/financial-services/restructuring/corporate-insolvency-the-basics/