Liquidation usually occurs when a company becomes insolvent (unable to pay its debts as they fall due). The process involves appointing a Liquidator who will then take the appropriate steps to make the company solvent again or bring the business to an end.
There are a number of ways a company can go into liquidation. In most cases, where the company decides to call it quits, the shareholders will appoint a liquidator.
Because the resolution is a major transaction the rules governing this resolution are separate from normal board decisions, and these differ from company to company depending on their constitutions.
However, in almost all cases, the following should suffice:
- The company needs to call a shareholders meeting. In the notice enclose a copy of the resolution appointing a liquidator.
- If all the shareholders are in agreement there is no need for a shareholders meeting. It only becomes an issue if there are some shareholders who may not agree on liquidation.
- A special resolution usually requires 75% of all eligible shares voting for the resolution.
Importantly, in most cases, a board resolution is not sufficient to put the company into liquidation, unless the companies constitution makes provision for the board doing this.
Once a liquidator is appointed either by the shareholders or the court, the liquidator is obliged to:
- Call a creditors meeting (in most cases)
- Investigate the activities of the directors and affairs of the company
- Take charge of the company’s asset
- Realise the assets of the company for the best value
- Distribute the assets according to the legislation
- Report any criminal activity
- Report on progress to the creditors and shareholders
In theory, a liquidator appointed by the shareholders is only an interim liquidator, and must be confirmed by the creditors at a creditors meeting. In reality, liquidators, once appointed, are rarely removed from office.
The 10 Day Rule
If a creditor has petitioned the court to liquidate your company you have ten days to appoint your own liquidator or enter Voluntary Administration. After that time, the company must settle with the creditor or face having a court appointed liquidator, usually one chosen by the creditor.
A company loses the right to appoint their own liquidator 10 days after court action has commenced to liquidate. In theory it should make no difference if a liquidator is appointed by the Company or if the liquidator is appointed by the courts. The difference can be significant. A liquidator has a lot of discretion as to how to treat the large number of issues that arise in each liquidation.