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Lubinisha Saha, Advocate, J Sagar Associates, New Delhi, India and Rohit Kumar, Advocate, J Sagar Associates, New Delhi, India
Meaning and types of liquidation . These provisions apply equally to a listed company. the focus is on the concept of winding up. Whereas Indian law does not define bankruptcy. However. The terms winding-up proceedings and liquidation proceedings are used interchangeably in this article. Dissolution of the company takes place after the entire process of winding up is over. The most important difference between bankruptcy and winding up is that in a bankruptcy proceeding the property of the bankrupt passes to a trustee who is appointed by a court to sell the property to pay the debts of the bankrupt party. a public limited company as well as a private limited company. Winding up is a process whereby all assets of the company are realised and used to pay off the liabilities and members. for the purposes of this article. The provisions of the Act guide the entire winding-up process The terms ‘winding up’ and ‘dissolution’ are sometimes erroneously used to mean the same thing. in a winding up of a company. it defines winding up under the (Indian) Companies Act. all the assets of the company still remain with the company until its dissolution. Dissolution puts an end to the life of the company.Bankruptcy and winding up Bankruptcy of a company is not the same thing as winding up of a company. they are quite different in their meanings. However. As the concept of bankruptcy is not of much relevance in India. 1956 (the ‘Act’). it is ‘winding up’ that is applicable. unless disposed of in the course of winding up by the liquidator. A dissolution order passed by the court is like the death certificate of the company. In the event of an Indian company registered under the Act becoming insolvent.
the entire process is done without court supervision. pay off the liabilities and distribute the surplus as expeditiously as possible. a company may be wound up in any one of the following three ways:1 (a) by the court2 making a winding-up order (compulsory winding up). The court appoints an administrator. When the winding up is complete. The objective behind the winding up of a company is to realise the assets. who takes control of the company.Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. Voluntary winding up In the case of voluntary winding up.called a ‘liquidator’. (b) by passing of an appropriate resolution for voluntary winding up at a general meeting of members (voluntary winding up). takes possession of its assets and finally distributes any surplus among the shareholders in accordance with their respective rights. the relevant documents are filed before the court for obtaining the order of dissolution. Under section 425 of the Act. A Examples of Liquidation Preferences . and (c) voluntary winding up subject to supervision of the court.
The investors have a liquidation preference of 2x their investment. Example: The company has 100. they take $1mm from the $5mm sell amount. I decided to break down the common liquidation preferences with examples for easy reference. Participation Upon a liquidation event. The $4mm remaining is then split among the 100. An important note. I hardly see examples of each preference. Since they invested $500k. the investors participate with the other shareholders. Investors = $1m for $500k.000 outstanding shares. . Although many sites break down what liquidation preferences mean. Liquidation Preferences A liquidation preference is the ability for the investors to take there money out before the money left over is divided among the shareholders.Liquidation preferences are a common thing to see in a term sheet. and capped participation. They previously took a $500k investment. This typically is a 1x (meaning the investors get their original investment back). there is full participation (the example below).000 outstanding shares. The company sells for $5mm. Shareholders = $4mm. meaning there is only so much the investors can take then it stops. non-participating (example above). If the investors have a liquidation preference with participation they have the ability double dip at the liquidation event. but can be higher.
They take their investments out of the company proportionally (pro-rata). the free encyclopedia .000 the investor gets to "participate in. Investor A: $8. This means the series B and series A investors are "equal" to each other.000 outstanding shares. Since they invested $500k. If the company exits for $25m the series A investors take $10m. leaving only $5m for the series A investor. The oldest investor is more senior than the newer investor. so for each $2 investor B takes. investor A gets $1. Investors = $1.333 Investor B: $16. The investors have a liquidation preference of 2x their investment. leaving only $15m for the series B investor. they take $1mm from the $5mm sell amount. The investors receive 20% of the company and another 25. Example: The company takes a series A liquidation preference of $10m (They took 20% of the company) and a series B pari passau liquidation investment of $20m (They took 20% of the company). Series B investor has a 2:1 investment over the A investor.2mm.00 ($4mm / 125. The most recent investor is senior to to the others. The $4mm remaining is then split among the 125. The company exits for $30m. They take a $500k investment at a $2mm valuation. meaning they get there money first. Example: The company takes a series A liquidation preference of $10m and a series B senior liquidation investment of $20m. The company sells for $5mm.000 outstanding shares. First money in. Let me know if this was helpful or confusing for you. The extra 25.666. Example: The company takes a series A liquidation preference of $10m and a series B junior liquidation investment of $20m. Pari Passu Liquidation Preference Something which sounds complicated but isn't.Example: The company has 100.8mm. Shareholders = $3. voluntary winding up may be done by the members or the creditors. Liquidation From Wikipedia. Senior Liquidation Preference This comes into play when a company has taken multiple series of investments." making each share valued at $32.000). Junior Liquidation Preference The exact opposite of a senior liquidation preference. Hopefully these examples help you.333. If the company exits for $25m the series B investors take $20m. is first money out.666.000 shares are issued to the investors.
Please help improve this article by adding citations to reliable sources. The examples and perspective in this article deal primarily with the United Kingdom and do not represent a worldwide view of the subject. For other uses. (September 2009) Look up liquidation in Wiktionary. (December 2010) This article needs additional citations for verification.2 The order 2 Voluntary liquidation 3 Misconduct 4 Priority of claims 5 Dissolution 6 Striking off the Register 7 Phoenix companies 8 As a metaphor 9 See also 10 Footnotes Compulsory liquidation . the free dictionary. an authority or agency in a country responsible for collecting and safeguardingcustoms duties.1 Grounds 1. determines the final computation or ascertainment of the duties or drawback accruing on an entry. although dissolution technically refers to the last stage of liquidation. Unsourced material may be challenged and removed. liquidation is the process by which a company (or part of a company) is brought to an end. see below). Not to be confused with liquefaction. 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. Liquidation is also sometimes referred to as windingup or dissolution. Contents [hide] 1 Compulsory liquidation o o 1. see Wind up (disambiguation)."Winding up" redirects here. and the assets and property of the company redistributed. In law. Please improve this article and discuss the issue on the talk page. The process of liquidation also arises when customs. a concept in physics.
 The order .e. 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 parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction. particularly. but generally. or of an implied obligation to participate in management. 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. It can take account of personal relationships of mutual trust and confidence in small parties. the vast majority of compulsory winding-up applications are made under one of the last two grounds. 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 contributories the Secretary of State (or equivalent) the Official Receiver Grounds The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions. A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to equitable considerations. 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. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director. where there is a breach of an understanding that all of the members may participate in the business. 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 corporation. and has not been issued with a trading certificate (or equivalent) within 12 months of registration it is an "old public company" (i. for example.
a liquidation committee may be appointed. In such case. for instance. and not when the court makes the order). the general meeting will appoint the liquidator(s). whereas via an MVL distributions would be treated as capital gains receipts. the court may either dismiss the petition. Undervalue transaction. The liquidator will normally have a duty to ascertain whether any misconduct has been conducted by those in control of the company which has caused prejudice to the general body of creditors. Separate meetings of creditors and contributories may decide to nominate a person for the appointment of liquidator and possibly of supervisory liquidation committee. The court may dismiss the application if the petitioner unreasonably refrains from an alternative course of action. and a meeting of creditors will be called. the liquidation will proceed as a creditor's voluntary winding-up. Since 1 March 2012. The court may appoint an official receiver. but the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the contributories. Misconduct Main articles: Fraudulent trading. If the company is solvent. when a retail establishment wishes to close stores. In some . and the members have made a statutory declaration of solvency.Once liquidation commences (which depends upon applicable law. Where a voluntary winding-up of a company has begun. a compulsory liquidation order is still possible. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation. the liquidation will proceed as a members' voluntary winding-up. the demand for cheap MVLs has increased significantly. and has general powers to enable rights and liabilities of claimants and contributories to be settled. but will generally be when the petition was originally presented. They will sell to a company that specializes in store liquidation instead of attempting to run a store closure sale themselves. changes in tax legislation (specifically the removal of ESC C16) have meant Members Voluntary Liquidations (MVLs) can be a tax efficient method of shareholders extracting funds from a redundant company. and the company will generally cease to carry on business at that time (if it has not done so already). Unfair preference and Wrongful trading. If a company's assets exceed £25.000. In addition. to which the directors must report on the company's affairs. Upon hearing the application. or make the order for winding-up. Voluntary liquidation begins when the company passes the resolution. and litigation involving the company is generally restrained. This is used. the term liquidation is sometimes used when a company wishes to divest itself of some of its assets. Voluntary liquidation Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. If not. dispositions of the company's property are generally void. and one or more liquidators. upon strike off any distributions would be taxed on the shareholders as dividends. Because of this legislative change.
the priority of claims on the company's assets will be determined in the following order: 1. Property which is in the possession of the company. Priority of claims See also: Secured creditor. and satisfy those claims in the manner and order prescribed by law. 8. 2. 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 . 3. The liquidator must determine the company's title to property in its possession. For example.legal systems. Preferential creditor and Unsecured creditor The main purpose of a liquidation where the company is insolvent is to collect in the company's assets. 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. After the removal of all assets which are subject to retention of title arrangements. and compel the liquidator to transfer title to the land to them. upon tender of the purchase price. Generally. security by way of floating charge may be postponed to the preferential creditors. In most legal systems. fixed security. only fixed security takes precedence over all claims. 6. 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. 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. Claimants with non-monetary claims against the company may be able to enforce their rights against the company. but which was supplied under a valid retention of title clausewill generally have to be returned to the supplier. 5. the liquidator will pay the claims against the company's assets. or are otherwise subject to proprietary claims of others. in appropriate cases. 4. 9. the liquidator may be able to bring an action against errant directors or shadow directors for either wrongful trading or fraudulent trading. 7. determine the outstanding claims against the company. 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.
However. the court has a discretion for a period of time after dissolution to declare the dissolution void to enable the completion of any unfinished business. and the company's file remains inactive. In business terms this will mean liquidating a company as the only option and then resuming under a different name with the same customers. the Registrar at Companies House will strike the company off the register. the company may elect to simply be struck off the Register as a cheaper alternative to a formal winding-up and dissolution. the liquidator must call a final meeting of the members (if it is a members' voluntary winding-up). no case is shown why the company should not be struck off. In some circumstances it may appear ideal for the directors. after enquiry. often referred to as a 'phoenix' company. and they may strike off the company if there is reasonable cause to believe that the company is not carrying on business or has been wound-up and. many companies in debt decide it's more beneficial to start again by creating a new company. in due course. The company is then dissolved. Shareholders (Liquidating distribution) Unclaimed assets will usually vest in the state as bona vacantia. The liquidator is then usually required to send final accounts to the Registrar and to notify the court. in such cases the company may be restored to the Register if it is just and equitable so to do (for example. In such cases an application is made to the Registrar. Persons participating in the management of the 'Phoenix' company may also be held personally liable for the debts of the company under s217 of the Insolvency Act unless the Court approval has been granted. in common jurisdictions. if the rights of any creditors or members have been prejudiced). In the event the company does not file an annual return or annual accounts. clients and suppliers. however if they trade under a name which is the same or substantially the same as the company in liquidation without approval from the Court they will be committing an offence under S216 of the Insolvency Act 1986 (and equivalent legislation in UK regions). As a metaphor . However.  Striking off the Register In some jurisdictions. Dissolution See also: Dissolution (law) Having wound-up the company's affairs. Phoenix companies In the UK.10. creditors (if it is a compulsory winding-up) or both (if it is a creditors' voluntary winding-up).
creditors can force a debtor into Chapter 7 by filing the petition themselves. disobeyed court orders. If all the debtor's assets are exempt or subject to liens. in some states) then appoints an impartial trustee to handle the case and liquidate the debtor's assets. Ultimately. In . as well as a list of creditors and outstanding debts.S.S. (In some cases. Individuals. The U. garnishments. or did not seek credit counseling. which lets them attempt to restructure the company and restore the ability to service debt. a judge decides whether to discharge an individual's debt. Liquidation 1 What It Is: Liquidation refers to the selling of assets in return for cash. there may not be any assets to liquidate and hence no money to distribute to creditors. "liquidation" can mean the murder of a person or group who threatens a country or political organisation. Filing the Chapter 7 petition automatically stops most collection actions against the debtor. the creditors usually file a written claim so that they can receive some of the proceeds. nor can most judgments against the debtor for criminal acts. The judge can deny the discharge if the debtor failed to keep adequate records. however. committed a crime. including lawsuits.a section of U. Individuals To file Chapter 7. bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts. In most cases. the debtor files a petition with the local bankruptcy court. and student loans generally cannot be discharged in a Chapter 7 case. failed to explain the loss of any assets. and phone calls. trustee (or the court itself. Here's how liquidation works in the case of bankruptcy.In informal usage. If there are assets to liquidate. The trustee handles the liquidation and determines which creditors are paid first. Public companies must also file a form 8-K with the SEC to notify shareholders of the bankruptcy proceedings. Businesses The procedure for filing Chapter 7 bankruptcy is very similar for businesses. Alimony. Most companies do not file Chapter 7 until they've been unsuccessful with a Chapter 11 filing. How It Works/Example: The term liquidation is most often used in discussions about Chapter 7 bankruptcy -.) The debtor must provide the court with financial and tax information. child support. partnerships or corporations can liquidate assets. the court also requires proof that the individual has obtained credit counseling.
at the individual level -. For businesses. In the end. Lenders whose debt is backed by collateral are generally repaid first (via the receipt of the collateral). and the appointed trustee liquidates the company's assets in order to repay its debts. which -. investors might be able to deduct their losses on their tax returns. Why It Matters: Liquidation is usually the last step in the effort to repay debt. unsecured bondholders receive only pennies on the dollar.Chapter 7. However.virtually ruins a person's credit for several years. In many cases. the steps preceding liquidation usually involve bankruptcy. liquidation usually means closing for good and selling off all the assets. . if a company's stock or bonds are deemed worthless by the bankruptcy court. making it very difficult and expensive to borrow money in the future. a company ceases operations. followed by the unsecured lenders and then the shareholders. Shareholders almost never receive anything.
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