Liquidation Preference
The main purpose of a liquidation where the company is insolvent is to collect in the company's assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law. The liquidator must determine the company's title to property in its possession. Property which is in the possession of the company, but which was supplied under a valid retention of title clause will generally have to be returned to the supplier. Property which is held by the company on trust for third parties will not form part of the company's assets available to pay creditors.
Before the claims are met, secured creditors are entitled to enforce their claims against the assets of the company to the extent that they are subject to a valid security interest. In most legal systems, only fixed security takes precedence over all claims. Security by way of floating charge may be postponed to the preferential creditors.
Claimants with non-monetary claims against the company may be able to enforce their rights against the company. For example, a party who had a valid contract for the purchase of land against the company may be able to obtain an order for specific performance and compel the liquidator to transfer title to the land to them, upon tender of the purchase price. 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.
Plane Liquidation
Planes are an example of liquidated items when companies "go under. " They are generally auctioned off to the highest bidder.
Priority of Claims
Generally, the priority of claims on the company's assets will be determined in the following order:
- Liquidators costs
- Creditors with fixed charge over assets
- Costs incurred by an administrator
- Amounts owed to employees for wages/superannuation (director limit $2,000)
- Payments owed in respect of workers' injuries
- Amounts owed to employees for leave (director limit $1,500)
- Retrenchment payments owing to employees
- Creditors with floating charge over assets
- Creditors without security over assets
- Shareholders (Liquidating distribution) - Most preferred stocks are preferred as to assets in the event of liquidation of the corporation. Stock preferred as to assets is preferred stock that receives special treatment in liquidation. Preferred stockholders receive the par value (or a larger stipulated liquidation value) per share before any assets are distributed to common stockholders. A corporation's cumulative preferred dividends in arrears at liquidation are payable even if there are not enough accumulated earnings to cover the dividends. Also, the cumulative dividend for the current year is payable. Stock may be preferred as to assets, dividends, or both.
- Unclaimed assets will usually vest in the state as bona vacantia.