Shareholders are key stakeholder’s in a business. Their investment in the company entitles them to part ownership of it, with cash-flow rights and voting rights. However, what happens when a company is not performing to expectations, faces financial hardships, or is unable to pay its creditors by the due dates? In the face of potential liquidation, do shareholders have the right to liquidate the company?
This article will explore the details of company liquidation and the role of shareholders in liquidating a company.
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What is liquidation?
In finance and economics, liquidation occurs when a company is made insolvent (meaning it is unable to pay for its debts and obligations when they are due). During liquidation the company is bringing its processes to an end. The remaining assets and property of the business are sold or redistributed to pay creditors or shareholders, based on the priority of their claims. Additionally, liquidation is also sometimes referred to as winding-up or dissolution.
How can you Liquidate a Company?
There are two ways for an insolvent company to begin liquidation, being compulsory and voluntary liquidation.
If your company faces compulsory liquidation, then your company has had an application against it by a creditor. If a company faces court liquidation then a liquidator by court appointment will wind up the company.
Voluntary liquidation is the most common form of liquidation and occurs in two main ways. One, following voluntary administration or a terminated deed of company agreement where creditors have voted for the companies liquidation. Finally, where the shareholders of the company successfully vote to have it liquidated and appoint a liquidator.
Liquidators
During liquidation the liquidators primary role is to apply the assets and property of the company and pay the company’s creditors. Any remaining surplus is redistributed among the company’s members, such as the shareholder’s. Additionally, if a liquidator is appointed to your company, they have a number of other functions to carry out.
- Investigating and reporting the company’s affairs to creditors.
- Investigating the circumstances of the company’s failure and potential breaches of law, for report to ASIC.
- After the costs of liquidating, the proceeds of the realization of assets will be distributed. Priority will be given to secured creditors, these are often people with a registered interest on the PPSR. Also, following them will be unsecured creditors.
When can Shareholders Liquidate a Company?
In typical scenarios of voluntary liquidation, the company’s board of directors, or other ownership, initiate a liquidation resolution. This resolution to cease the company’s operations and begin liquidation is enacted when approved by shareholders in a vote. This is where shareholders can liquidate a company. As such, while shareholders might not be the ones who initiate the decision to liquidate a company, it is there choice whether to begin liquidating or not.
Voluntary Liquidation
During voluntary administration, shareholders do not get a say in the future of the company. The administrator’s appointment is to resolve the direction of the company’s future, waiting for shareholder votes would slow the process. If this isn’t possible, the administrator seeks to attain the best returns for the company’s creditors. As a result, almost at all times the liquidator’s duty is to the creditors first. Liquidators do not even have a duty to report on the progress or outcome of liquidation to shareholders. Consequently, shareholders have a low priority a during liquidation are unlikely to receive any dividend.
Involuntary Liquidation
During compulsory or court liquidation, the situation is very similar. However, the main difference is that the shareholders have no say in deciding to liquidate the company. During both forms of liquidation, any variance or transfer in shareholders shares will not be effective. Also, shareholders must seek the liquidators consent, or court approval, to change the status of shares.
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