Liq­ui­da­tion of a company: De­f­i­n­i­tion

If a company or as­so­ci­a­tion becomes insolvent or holds too much debt, there are two possible options: in­sol­ven­cy or liq­ui­da­tion.

The decision all depends on what you want to happen to the company or as­so­ci­a­tion next. If you are still able to see a future for the or­ga­ni­za­tion, then you should consider in­sol­ven­cy. On the other hand, if you’re sure that the fate of your company is sealed, you should consider liq­ui­dat­ing your assets as your final act as an owner, share­hold­er or member of the board of directors.

The liq­ui­da­tion process is always the same in principle, re­gard­less of a company’s legal form.

Liq­ui­da­tion is ap­pro­pri­ate if a cor­po­ra­tion or part­ner­ship becomes insolvent and therefore needs to be dissolved. The aim is to make the company’s remaining assets (e.g. buildings, machinery, vehicles) liquid in order to meet all your li­a­bil­i­ties – i.e. to convert them com­plete­ly into cash or other funds that can easily be exchanged into cash.

The remaining assets are also called “liq­ui­da­tion proceeds”. They are intended to:

1. Firstly, cover creditor’s claims
2. Secondly, be dis­trib­uted to share­hold­ers or passed to the owner.

The liq­ui­da­tion process cannot begin until the company has been dissolved according to the legal framework. The dis­so­lu­tion marks the end of the business and initiates the liq­ui­da­tion phase during which all remaining assets are revalued.

• Com­pul­so­ry liq­ui­da­tion: occurs where a business entity is forced to close down by order from a court of law. In order to interfere with the company’s op­er­a­tions, the court needs to have a petition by someone who is connected to the company, such as the company director or any creditor who has not been paid.
• Voluntary liq­ui­da­tion: when the or­ga­ni­za­tion’s man­age­ment team including the directors, members and share­hold­ers, decide to dissolve the company due to the fact that it is unable to carry on func­tion­ing. This is mainly because there are not enough funds to perform its op­er­a­tions ef­fec­tive­ly.

When a company defaults, it usually has two options: either liquidate its remaining assets, or file for bank­rupt­cy.

Liq­ui­da­tion is only possible if a company is either ter­mi­nat­ed regularly (e.g. because it was only invested for a certain period of time) or if in­sol­ven­cy is rejected due to a lack of assets.

In­sol­ven­cy pro­ceed­ings may be initiated if the company is insolvent, is in danger of in­sol­ven­cy or if over-in­debt­ed­ness is emerging. The in­sol­ven­cy court then provides the company with an in­sol­ven­cy ad­min­is­tra­tor. This ensures that the company is either shut down or resolved in ac­cor­dance with legal pro­vi­sions, i.e. closed or re­ha­bil­i­tat­ed to resume normal business op­er­a­tions.

Similarly to liq­ui­da­tion, the company loses all their assets in the event of liq­ui­da­tion as part of in­sol­ven­cy pro­ceed­ings. However, it stays in its current legal form. Therefore, in­sol­ven­cy makes sense whenever a company needs to be re­ha­bil­i­tat­ed after going bankrupt. On the other hand, liq­ui­da­tion is an option if ter­mi­nat­ing a company is a matter that has already been decided, or if an ap­pli­ca­tion for in­sol­ven­cy was rejected by the court because there wasn’t suf­fi­cient money to pay the cost of the court pro­ceed­ings.

Before a company is brought to a close, if first needs to be properly dissolved. This requires the share­hold­er’s decision, which must have been made by a three-quarter majority (unless otherwise stip­u­lat­ed in the articles of as­so­ci­a­tion). Next, you must file for dis­so­lu­tion with the relevant state and federal au­thor­i­ties and the IRS. The company then becomes a res­o­lu­tion company.

From that point on, a liq­uida­tor takes over the set­tle­ment process. They must strictly comply with the ap­plic­a­ble laws and should therefore be an expert in the field. A board member or the managing director is usually a good pick for this role. It is also possible to designate an external legal or natural person as the liq­uida­tor through a clause in the part­ner­ship agreement or a res­o­lu­tion in the Annual General Meeting. This in­di­vid­ual would then act on behalf of man­age­ment and represent them in the outside world, and in court. However, re­gard­less of who takes on this task, the De­part­ment of Justice will also appoint a trustee to oversee the pro­ceed­ings to ensure that all legal re­quire­ments are being met.

The main objective of a liq­uida­tor is to generate as many assets as possible in order to benefit creditors and share­hold­ers. To this end, they are given full power of action and may also close new contracts if necessary.

A number of laws regulates exactly how the res­o­lu­tion process should be carried out. Certain special reg­u­la­tions apply to some legal forms e.g., for a general part­ner­ship, or a limited company.

However, the basic procedure for liq­ui­dat­ing a company is the same for all of them:

1. Creating a balance sheet: One of the liq­uida­tor’s tasks is to obey the rules of proper ac­count­ing. This means, for example, that they must draw up a balance sheet on the res­o­lu­tion’s threshold date. They also are re­spon­si­ble for creating a new invoice section for resolving the company.
2. Reaching out to creditors: For creditors to be able to bill any out­stand­ing claims against the company, they first need to be informed of the company’s impending closure. To do this, the liq­uida­tor must publish a cor­re­spond­ing notice in the company’s relevant bulletins. This could include physical pamphlets, elec­tron­ic newslet­ters or business magazines. They must also notify the relevant creditors by mail.
3. Set­tle­ments: In addition to ter­mi­nat­ing all ongoing company business, the actual set­tle­ment procedure also includes re­cov­er­ing out­stand­ing claims. Similarly, all the company’s out­stand­ing debts must be paid. The liq­uida­tor can convert the remaining assets into money if the company’s debts cannot be settled any other way.
4. Interim balance sheets: If the set­tle­ment process drags on for more than one year, the liq­uida­tor must prepare an interim balance sheet including a man­age­ment report for each financial year. The latter is intended to provide any legal au­thor­i­ties with an insight into the company’s current legal situation and to document that the interests of creditors and share­hold­ers have been safe­guard­ed.
5. Final balance sheet: In order to complete the detailed accounts, a final balance sheet should be made at the end of the process.

In fact, the liq­ui­da­tion process itself no longer includes de-reg­is­ter­ing the business with the Secretary of State. This can only take place once there are no longer any company assets, meaning that a material liq­ui­da­tion has finally been completed. Once this can be confirmed by the De­part­ment of Justice, then the company can of­fi­cial­ly be removed from all registers. Once the formal liq­ui­da­tion is complete, either the liq­uida­tor or a third party must keep the company books and documents on file for an ad­di­tion­al 10 years in order to make them available should the local or federal tax au­thor­i­ties care to begin a retroac­tive in­spec­tion of the books.

The final step is dis­trib­ut­ing the assets among the company share­hold­ers – provided that there are any remaining once the out­stand­ing creditors have been paid. However, this step can only take place at the end of a blocking year, which begins when the dis­so­lu­tion an­nounce­ment is published, and creditors are notified. The way money is dis­trib­uted among share­hold­ers depends on their nominal shares.

Liq­ui­da­tion does not nec­es­sar­i­ly have to happen only as a result of your company going bankrupt. Sometimes there are other reasons to do so, which might have nothing to do with in­sol­ven­cy. These could include:

Sixty-seven year old Charlie is the head of a craft en­ter­prise and plans to retire after decades of suc­cess­ful work. His greatest wish is that one of his children should take over the family business and continue to run it. However, none of them seem to be in­ter­est­ed in this, but Charlie still doesn’t want to see his life’s work in the hands of an external buyer. Instead, he decides to liquidate his company. As the sole share­hold­er, he can decide to dissolve the company of his own ini­tia­tive, and start filing for liq­ui­da­tion whenever he sees fit.

Somewhat frus­trat­ed that his family business is coming to an end, Charlie is reluctant to deal with the set­tle­ment details himself. So, he hires his old friend Carl, a person he trusts and who has the necessary pro­fes­sion­al skills, and appoints him the official liq­uida­tor. From now on, Carl will take care of anything as­so­ci­at­ed with liq­ui­dat­ing Charlie’s company – including the public dis­so­lu­tion an­nounce­ment and informing creditors, as well as handling the ac­count­ing aspects.

Within the financial year, Carl is able to sell all the company machines, resulting in a con­sid­er­able sum of liq­ui­da­tion proceeds. Charlie does not have to include the land his company is located on in the procedure, since he wants to keep it. Once all the creditor claims have been satisfied and all necessary liq­ui­da­tion measures have been taken, Carl of­fi­cial­ly dissolves the company and removes it from the Secretary of State’s register. Charlie takes re­spon­si­bil­i­ty for the business books and documents with the intention of safe­guard­ing them for the next decade. Now, he just has to wait until the end of the mandatory blocking year to start with­draw­ing from the company’s assets.

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