Business liquidation is a process associated with the dissolution or sale of a business. It is the process by which the company’s assets are sold or converted into monetary funds, with the proceedings going to company members, shareholders, and outside creditors who are owed money by the company.
Liquidation usually occurs in connection with the breakup or dissolving of the company, although it can happen for various other reasons besides the termination of the business.
Compulsory business liquidation is where the business is required to begin liquidation according to a court order. This type of liquidation may be requested through the courts by:
- The company
- Creditors, who must establish a prima facie case first
- The Secretary of State or its equivalent
- The Official Receiver
Some valid reasons for ordering compulsory liquidation may include:
- The company itself has resolved that liquidation is necessary, but needs a court order to enforce the process
- The company was never issued with a valid trading certificate within a year of its registration
- The company is classified as an “old public company," meaning that it has not re-registered or has become a private company under certain state laws
- The company has not actually begun business operations within the required time frame, since companies are usually required to begin operations within one year of incorporation
- The company does not have enough members to meet statutory requirements
In contrast, voluntary liquidation is where the business members or leaders deem it necessary to dissolve the company, begin the wind-up phase, and liquidate the assets. The company needs to pass a resolution, which is usually passed by vote, at which point the business may also cease normal operations.
If the company is in debt, they may also begin addressing their debt with creditors. In some cases, a liquidation committee will be formed to specifically oversee the liquidation phase.
If voluntary liquidation has already begun, it is sometimes still possible for a party to file for compulsory liquidation. This can occur if there is a legal dispute over the current liquidation process. For example, members of the company may file for compulsory liquidation if some of the members feel that the voluntary liquidation decisions are yielding unfair distribution results.
Any proceeds from the liquidation are required to be distributed to various parties in a certain order, called the “priority of claims." The liquidated assets must be distributed in this order:
- Creditors of the business are paid first from the liquidation funds
- Owners of debt securities are paid second
- Any remainders are paid to stock owners of the company, with preferred stock holders being paid before common stock holders
The priority of claims is one of the areas that gives rise to the most legal claims and lawsuits. For example, there may be several different creditors vying for priority in the distribution chain, in which case the intervention of the court may be necessary.
Business liquidation laws can often vary from state to state, and may also be very complicated to deal with. Whether your business is smaller or larger, it is in your best interests to contact an experienced business lawyer if you need assistance with the business liquidation process. Your attorney can assist you with the various filing requirements, and can represent you in court if a lawsuit needs to be filed.