Liquidation and Receivership

8/11/2019 Liquidation and Receivership

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When looking at the success or

failure of a business we use

words such as solvency andliquidity.

Liquidity may be seen as an

firms ability to meet its currentpayments as they become

due.(current debts)

Solvency may be seen as anentitys ability to generate

enough cash to repay long-term

debts as they mature (fall due).


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Act of Bankruptcy

A business may be considered to have

committed an act of bankruptcy when

- The business gives notice to its creditors

that it has suspended payments of its

debts

- The business ceases to make payments on

its liabilities when they fall due

- The business calls a meeting with its

creditors and presents a written statement

of its inability to pay its debts.


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Definitions of Liquidation

Liquidation is the process of

converting securities or other

property into cash.

or

Liquidation is the process of

taking a business real assets

(fixed assets) and turning them

into cash, either to pay off debt

or to reap a personal profit.


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Benefits of Liquidation

Liquidations are often a wonderful

source of money to buy new

equipment (retool) and materials for

start-up companies or companieslooking to expand their business.

Liquidation may also be done to pay

off creditors

Liquidation may be done for personalgain or profit


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TYPES OF LIQUIDATION

Liquidation may be done either

voluntarily by a company or

individual,

Compulsory liquidation or

winding up


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Why voluntary

liquidation? Voluntary liquidation may be done

for a number of reasons. Somecompanies elect to undergo

liquidation while their assets stilloutweigh their liabilities, if theybelieve their business will continueto degrade.

By selling off assets early, thesecorporations may pay off creditorsand still give a final dividends forshareholders.


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A corporation with liabilities

outweighing assets may alsoundergo voluntary liquidation,expecting a compulsoryliquidation should they fail topay off a significant portion oftheir debt.

This type of voluntary

liquidation is considered anappropriate response to aninsolvent situation.


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Lastly, a recently acquiredcorporation may undergo voluntary

liquidation as a way for the

investment group in charge of the

takeover to realize immediate profitsand to pay off their high-interest

bonds.

This technique is often referred to as

asset stripping, and is looked upon

as an incredibly hostile technique.


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What is Compulsory

Liquidation?

Compulsory liquidation (or

compulsory winding up) - this is

when the court makes an orderfor the company to be wound up

(a 'winding-up order') on the

petition of an appropriateperson.


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Compulsory Liquidation The parties (appropriate persons) who are

entitled by law to petition for the

compulsory liquidation include:

the company itself

(If you are a director or a shareholder andyou are also a creditor of your company,

you may wish to present a winding-uppetition on the grounds that the companycannot pay its debts).

any creditor who establishes aprima facie

case


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Compulsory Liquidation

In a nutshell

How does a bankruptcy or

compulsory liquidation happen?

A petition made by you (in a

bankruptcy)

or

A petition by one or more

creditors


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Steps in liquidation

Establish grounds of

liquidation

Petition for receiving order

Appoint receivers and official

receiver or receiver-manager


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Grounds

The first step in the receivership

process is determining that thebusiness has committed an act ofbankruptcy. This include:

- The firm gives notice to its creditors

that its has suspended payments ofits debts.

- The firm ceases to make paymentson its liabilities when they fall due

- The firm calls a meeting of itscreditors and presents a writtenstatement of its inability to pay itsdebts.


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Petition for receiving

order Once an act of bankruptcy has

been committed a creditor may

file a petition for a receivingorder.

Upon hearing the application

(i.e. petition for receiving order),the court may either dismiss the

petition, or make the order for

winding-up or liquidation.


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Appointing the Official

Receiver The Official Receiver may be notified

by the court of the liquidation

(bankruptcy or winding-up order). Official receivers are civil servants

They are attached to each court and

when a bankruptcy or compulsory

winding up is ordered one of themmay be appointed as official

receiver.


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Official Receiver as a Liquidator

In other words, the Official Receivermay act as liquidator.

Role of Liquidator

This person is responsible for the

winding-up of a company, takingcontrol of a firms affairs and

gathering assets with the view to

finding a buyer.

The Official Receiver (Liquidator) is

also responsible for paying off any

debts the firm may have.


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We have just finished looking at

liquidation.

Now let us look atReceivership


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Receivership

This is the liquidation (selling)

of a firms assets by an

independent bodyfollowing itscollapse.

When a firm is being liquidated

administrator or administrativereceiver may be appointed.


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When in a state of receivership,

the owner(s) lose theirownership of the firm (equity),

and moves into the hands of the

receiver (an independent body). When a business gets into

financial trouble an

administrator or administrativereceiver may be appointed.


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Administrative receivership

When a company borrows money,the lender is usually given somesecurity over the company's assetsto guarantee payment.

If the company fails to keep theterms of the loan or encountersfinancial difficulties, the lender maybe entitled to appoint anadministrative receiver.


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Role of Receiver

An administrative receiver is aninsolvency practitioner who hascontrol of the whole, or a substantialpart, of the company's property andwide powers over the business.

The administrative receiver is mainlyconcerned with getting back themoney owed to the secured creditor.The administrative receiver may sell

the assets piecemeal, or sell thewhole business as a going concernto pay off the secured creditor, andthe costs of the receivership.


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Role of receiver/receiver-

manager (in a nutshell)

The duties of a receiver or

receiver manager are:

- Duty to take control of assets

- Duty to realise security interest

of the creditor for whom he has

been appointed- Duty to carry on the business


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Whats next after

liquidation?


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Dissolution

Having wound-up (liquidating) thefirm, the liquidator must call a final

meeting of the members (if it is a

members' voluntary winding-up),

creditors (if it is a compulsorywinding-up) or both (if it is a

creditors' voluntary winding-up).

The liquidator is then usually

required to send final accounts to

the Registrar and to notify the court.

The company is then dissolved.


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Assignments

Further reading p. 373392 Study Guide Maraval Company is in the process of acquiring

Gordon Limited, a company that has been

experiencing financial difficulties for several

months. The financial difficulties began withworking capital problems but escalated

recently when the company was unable to meet

its loan interest and principal repayments on its

long-term debt.

Describe Gordon Limiteds current financial

situation and give a justification for answer.

(past paper q. 2008)

Liquidation and Receivership

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