Liquidation

What is Liquidation?

In law, liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed. Liquidation is sometimes referred to as 'winding-up' or 'dissolution', although dissolution technically refers to the last stage of liquidation. The process of liquidation arises when customs, or an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation, ascertainment of the duties, or drawback accruing on an entry.

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) .

Plane liquidation

Alitalia — Compagnia Aerea Italiana S.p.A. (Italian for Alitalia - Italian Air Company), is an Italian airline, which bought some assets from the liquidation process of the old Alitalia-Linee Aeree Italiane and the entire Air One.

Parties Entitled to Liquidation

The parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by:

• The company itself
• Any creditor who establishes a prima facie case
• Contributories
• The Secretary of State
• The Official Receiver

Priority of Claims

After the removal of all assets which are subject to retention of title arrangements, fixed security, or are otherwise subject to proprietary claims of others, the liquidator will pay the claims against the company's assets. Generally, the priority of claims on the company's assets will be determined in the following order:

1. Liquidators costs
2. Creditors with fixed charge over assets
3. Costs incurred by an administrator
4. Amounts owing to employees for wages/superannuation (director limit: $2000)
5. Payments owing in respect of workers's injuries
6. Amounts owing to employees for leave (director limit: $1500)
7. Retrenchment payments owing to employees
8. Creditors with floating charge over assets
9. Creditors without security over assets
10. Shareholders

Grounds for Liquidation

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 corporation, 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

LIFO Liquidation

LIFO liquidation refers to when a company using LIFO accounting methods liquidates their older LIFO inventory. This occurs if current sales are higher than current purchases, and consequently inventory not sold in previous periods must be liquidated.

Due to inflation and general price increases, the amount of money companies pay for inventory will usually increase over time. If a company decides to undergo LIFO liquidation, the old costs of inventory will be matched with the current, higher sales prices. As a result, this cost has a higher tax liability if prices have risen since the LIFO method was adopted.