Liquidation

I’m sure you guys are sick of the trite financial phrases that pop up every single day on the news by now. Nonetheless, I will put forward some terms today to help you gain a better understanding of its meaning. Hopefully this will allow you to better understand the reporters and economists the next time you switch on your television. Liquidation, I’m pretty sure that’s the term you come across most frequently nowadays, especially in the midst of a financial crisis. However, many are still not exactly sure of what this term really means. On this post, I will try to break apart this term by using analogies and lucid explanations along with the help from definitions online, credited from www.wikipedia.org.

In law, liquidation refers to the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed.
In this case, it literally means that the company has faced a crisis and is no longer able to sustain itself; it does not have the wherewithal to continue to operate anymore. To put it across simply, it is like the deconstructing of a structure made up of LEGO blocks and then constructing a new or similar figure once more. We break the assets of the company up and then we distribute them, which commensurate to the amount buyers are willing to pay. The entire could be build from scratch once again as well or taken over completely by the one who bought it over.

Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation) or voluntary (sometimes referred to as a shareholders' liquidation, although some voluntary liquidations are controlled by the creditors, see below).

It is compulsory usually when the creditors have already made a pact with the company that if it is unable to fulfill their concerted agreements. Sometimes, when they have no money to pay their creditors, they are forced to liquidate their assets and properties to pay back their debts.

In another case, it is voluntary when the shareholders decide to break up the company and reform it. It could also be the case whereby shareholders could no longer work with each other or that they want to venture out on their own with their forays into the respective companies. Either way, voluntary liquidation has to be concerted by all before it can be carried out, usually decided by the top management executive group.
The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the normal grounds to enable an application to the court for an order to compulsorily wind-up the company are:
the company has so resolved
the company was incorporated as a public company, and has not been issued with a trading certificate (or equivalent) within 12 months of registration
it is an "old public company" (i.e., one that has not re-registered as a public company or become a private company under more recent companies legislation requiring this)
it has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time
the number of members has fallen below the minimum prescribed by statute
the company is unable to pay its debts as they fall due
it is just and equitable to wind up the company
In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds.
Like today, most of the banks have fallen, up to 72 and the numbers are still rising. Most of them have no longer the wherewithal to carry out loans and investments due to a lack of reserves and many are filled with toxic assets. For large banks like Bank of America, the government and the relevant authorities are willing to absorb some of their toxic assets. However, in the case of smaller banks, they are just left to wither and die away. Therefore, they have no choice but to shut it down before they end up with more never-ending debts.
A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to equitable considerations. It can take account of personal relationships of mutual trust and confidence in small parties, particularly, for example, where there is a breach of an understanding that all of the members may participate in the business or of an implied obligation to participate in management. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director.
Once liquidation commences (which depends upon applicable law, but will generally be when the petition was originally presented, and not when the court makes the order), dispositions of the company's property are generally void, and litigation involving the company is generally restrained.
Dispositions of the company’s property being voided, in layman terms, mean that it cannot be touched; it is nullified and freed on the judgment of other laws. Litigation which means the conduct of a lawsuit is undermined.

In the UK, many companies in debt decide it's more beneficial to "start again". This is often called in the UK a "Phoenix". To enact a phoenix effectively means to die and then come alive again. In business terms this will mean liquidating a company as the only option and then resuming under a different name with the same customers, clients and suppliers. In some circumstances it can be ideal for the company.