CORPORATE LIQUIDATION

Insolvency
The financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due
in the ordinary course of business of has liabilities that are greater than its or his assets.

Kinds of insolvency
1. Voluntary insolvency – an insolvent debtor owing debt exceeding in amount in the sum of
P1,000, may apply to be discharged from his debts and liabilities by petition to the RTC of the
province or city in which he has resided for 6 months next preceding the filing of petition.
2. Involuntary insolvency – an adjudication of insolvency may be made by the petition of 3 or
more creditors, residents of the Philippines, whose credits or demands accrued in the
Philippines, for the amount of which credits or demands are in the aggregate of not less than
P1,000.

Possible Recourse of Insolvent Corporation

1. Liquidation
2. Reorganization (recapitalization, quasi-reorganization, corporate rehabilitation and troubled
debt restructuring)

Corporate Liquidation
Liquidation is the termination of business operations or the winding up of the affairs. It is a process
by which:
1. Noncash assets are converted to cash
2. Liabilities of the business are settled
3. Any remaining amount is distributed to shareholders

Financial Reports
1. Statement of Affairs – it is the initial report prepared that emphasizes liquidation values and
provides relevant information for the trustee in liquidating the debtor corporation. Unrecorded
asset or liabilities are included.
a. Assets
i. Asset pledged to fully secured creditors – these are assets with realizable values
equal to or greater than the liquidation value (i.e book value plus accrued
interest) of the related liabilities
ii. Assets pledged to partially secured creditors – these are assets with realizable
values less than the liquidation value of the related liabilities.
iii. Free assets – assets are not used as collateral for an obligation
b. Liabilities
i. Fully secured creditors – these are liabilities secured by assets with realizable
values equal to or greater than the liquidation value of such liabilities.
ii. Partially secured creditors – these are liabilities secured by assets with realizable
values less than the liquidation value of such liabilities.
iii. Unsecured liabilities with priority – liabilities without collateral but are designated
by the law to be paid before any other debts of the corporation.
a) Administrative expenses – administration fee of trustee or receiver,
liquidation cost, etc)
b) Unpaid employee salaries and wages and benefit plans
c) Taxes and assessments (i.e. income taxes, business taxes, excise taxes)
 d) Unsecured creditors without priority – all other liabilities.

2. Statement of Realization and Liquidation – it is an activity statement that is intended to

show progress toward the liquidation of a debtor’s estate. It is depicted like a T-account. It
contains:

Assets to be realized, excluding cash – beg. Assets not realized – ending balance of
balance of non-cash assets XXX noncash assets XXX
Assets acquired – new assets or additional Assets realized – noncash assets converted
assets recorded during the period XXX into cash during the current period XXX
Liabilities liquidated – liabilities paid during the Liabilities to be liquidated – beginning balances
period XXX of liabilities XXX
Liabilities not liquidated – ending balance of Liabilities incurred or assumed – new or
liabilities XXX additional liabilities during the period XXX
Supplementary debits/charges – items of Supplementary credits – gains realized during
expense or loss incurred during the period XXX the period XXX
XXX XXX

3. Statement of Receipts and Disbursement – it is a statement showing the beginning and

ending balance of cash as well as receipts and disbursements.

Computation of Recovery
1. Estimated recovery percentage of unsecured creditors = net free assets ÷ total unsecured
creditors
2. Recovery of priority liabilities = liquidation value of claims
3. Recovery of fully secured creditors = liquidation value of claims
4. Recovery of partially secured creditors = [(fair value of partially secured assets) + (recovery %
x excess of partially secured liabilities over the fair value of collateral assets)]
5. Recovery of unsecured creditors = recovery % x liquidation value of unsecured creditors
without priority

SOURCE:
Prof. Mark Alyson B. Ngina, CPA, CMA

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