Business liquidation is a process whereby the assets of a company are either sold or converted into monetary funds that are distributed to pay off any overdue debts, outside creditors, shareholders in the company, and/or company members. The process of liquidating a business often arises in connection with the dissolution, sale, or wind-up of a company.
In some cases, it may also occur when a business goes completely bankrupt or if the sole owner wants to retire. Additionally, a business may be liquidated when the company members no longer want to continue operating the business, the owner wishes to switch career paths, or the law requires that it be dissolved in the event that the sole owner or a co-owner has died.
Generally speaking, there are three main types of procedures for business liquidation: compulsory business liquidation, creditors’ voluntary business liquidation, and members’ voluntary business liquidation. Each of these procedures will be discussed in further detail throughout the next sections below.
To learn more about the various kinds of business liquidation and each of their related processes, you should contact a business lawyer who practices law in your area as soon as possible. A lawyer can apprise you of the different options and legal procedures provided under the laws in your jurisdiction. They can also recommend the best way to proceed with liquidating business assets based on the type of business being dissolved.
What Is Compulsory Business Liquidation?
Compulsory business liquidation may occur when a business is required to start the business liquidation process as a result of a court order. Compulsory business liquidation may arise when an interested party petitions the court for one.
Some examples of parties that may request that the court approve this type of liquidation include the following:
- The Secretary of State or a similar agent;
- The company itself or its shareholders;
- The creditors or lenders; and/or
- Any other outside parties to whom debts are owed.
Some examples of situations wherein this kind of liquidation may be requested can include when:
- The company itself has determined that liquidating the business is necessary, but requires a court order to enforce and begin the process for one reason or another (e.g., a dispute).
- A company has failed to start operating as a business within the requisite period of time as specified by law. For instance, most companies must usually begin operating as a business within one year from when their Articles of Incorporation were filed.
- The company does not have enough members to meet the statutory requirements in order to begin the liquidation process.
- A company is classified as an “old public” company, which generally means that the company has not bothered to re-register with newer documents or has become a private business under the relevant state laws.
- The company never received a valid trading certificate within the specified time frame (usually within one year from when a company registered with the Secretary of State).
- A company has failed to pay back the debt owed to outside creditors and lenders within a short period of time because it is insolvent.
What Is Voluntary Business Liquidation?
On the other hand, voluntary business liquidation is when the members or leaders of a certain company claim that it is necessary to begin the wind-up phase, liquidate the company’s business assets, and officially dissolve the company.
In order to initiate this kind of liquidation process, the members or leaders of the company will need to vote on and pass a resolution that demonstrates either all or the majority of members approve the need to liquidate the company.
After the motion is voted on, the company can cease all standard business operations if all the members have agreed to dissolve the company. The appointed persons can also start reaching out to creditors at this point if the company is indebted to them. In some companies, a dissolution committee may be formed for the purposes of overseeing the voluntary business liquidation process.
The dissolution committee may also opt to file for compulsory business liquidation at this stage even if the process of a voluntary business liquidation has already started. The committee may file for compulsory business liquidation when there is a legal dispute over the procedure being used for business liquidation.
For example, the members of a corporation may file for compulsory business liquidation when several of the corporate members believe that applying the voluntary liquidation process is leading to an unfair distribution of the liquidated business assets among the parties.
As previously discussed above in the first section, there are two types of voluntary business liquidation: one for creditors and one for members. The basic difference between the two is that the one for members will require them to take a vote in which seventy-five percent of the members must agree to liquidate the company. The process for creditors will only require that a company’s members or director appoint an individual to settle the company’s legal debts.
What Happens to the Corporate Assets in Relation to the Liquidation?
In the event that the business being liquidated is a corporation, the corporate assets will need to be distributed to a number of parties within a legally specified order. This particular order is known as the “priority of claims.”
Thus, the manner in which liquidated business assets must be allocated to the involved parties is as follows:
- First, the liquidated business assets (i.e., monetary funds) must be used to pay off any remaining balances on the business’s lines of credit as well as any federal and/or state business taxes that are still owed or overdue.
- The owners of debt securities should be the next parties in line to receive money left over from liquidated business assets, such as shareholders and common stockholders.
- Lastly, if there are any funds remaining after paying off all of these parties’ debts, then they should be distributed to the members of the corporation.
It is important to note that the priority of claims sequence is one of the most commonly litigated areas of corporate assets in regard to business liquidation lawsuits. For instance, a court may need to intervene when there is more than one creditor attempting to claim top priority in the sequence and not enough liquidated funds to pay off all the debts of each and every creditor.
Do I Need a Lawyer to Help Me with Business Liquidation Laws?
The laws on business liquidation will often vary from state to state. This can make it difficult to determine which procedures to use when liquidating a business. Therefore, it may be in your best interest to hire a local business lawyer to assist you with the process of liquidating your business.
A business lawyer who has experience in liquidating or dissolving companies will be able to offer valuable legal guidance on the relevant laws and can ensure that you and the other members within your company comply with all the appropriate requirements.
Your lawyer will also be able to file any necessary legal documents as well as will be able to provide legal representation in civil court if you need to take legal action or appear before a judge due to a dispute over the business liquidation process.
In addition, your lawyer will be able to assist you with the specific requirements of liquidating a particular type of business structure. For example, in order to dissolve a limited liability company (“LLC”), your lawyer will likely tell you that you need to provide a record of the vote to dissolve the LLC as an initial step. Your lawyer may also inform you that you need to submit the reasons as to why you are dissolving the LLC.
Finally, if you need help calculating the remaining taxes and debts that a business being liquidated owes to outside parties (e.g., creditors, lenders, etc.), your lawyer will be able to assist you with this fairly complex task as well.