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Liquidation / Dissolution

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. Liquidation can also be referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or 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).

Compulsory 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:

1. the company itself
2. any creditor who establishes a prima facie case
3. contributories
4. the Secretary of State (or equivalent)
5. the Official Receiver

Grounds

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:

1. the company has so resolved

2. the company was incorporated as a public company, and has not been issued with a trading certificate (or equivalent) within 12 months of registration

3. 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)

4. 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

5. the number of members has fallen below the minimum prescribed by statute

6. the company is unable to pay its debts as they fall due

7. 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.

An order will not generally be made if the real purpose of the application is other than for a winding-up, eg. the application is made just to enforce a debt.

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.

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