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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)