by Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. General partners are subject to liquidation.
All sales under the Bankruptcy Code, including sales of substantially all of a debtor’s assets, require bankruptcy court approval under Section 363 of the Bankruptcy Code. Typically, the debtor must show that it has obtained the highest and best bid for its assets through an auction process. In most cases, the debtor will obtain approval in advance of bid procedures, often with a stalking horse bidder already selected. When a stalking horse is used, the bid procedures approved by the court in advance will typically include a break-up fee and expense reimbursement if a higher and better bid is obtained in the sale process.
The bankruptcy court’s principal role is to adjudicate and preside over liquidations in order to ensure that a full and fair auction has been conducted and that the buyer satisfies the requirements of the Bankruptcy Court.
If a Chapter 7 case is commenced by the filing of a bankruptcy petition, or if the case is converted from a Chapter 11 case where no Chapter 7 trustee has been appointed, then an interim Chapter 7 trustee is appointed by the US trustee from a pre-selected panel of private trustees. A permanent Chapter 7 trustee may be elected at a creditors’ meeting held pursuant to the Bankruptcy Code, where creditors holding at least 20% of the allowable, undisputed, fixed, liquidated, unsecured claims may request and vote in an election (however, insider claimants and creditors with interests that are materially adverse to the other unsecured creditors may not request an election or vote). If no permanent Chapter 7 trustee is elected, then the interim Chapter 7 trustee becomes the permanent Chapter 7 trustee.
A Chapter 7 trustee’s primary obligation is to protect creditors’ interests. The Chapter 7 trustee must:
- Locate and collect all property of the debtor’s estate;
- Convert the property to cash by selling it following notice to parties in interest and a hearing by the bankruptcy court;
- Make distributions to the creditors in the order specified by the Bankruptcy Code; and
- Liquidate the estate as expeditiously as possible.
Additionally, to guarantee that its fiduciary obligations are met, among other things, a Chapter 7 trustee:
- Investigates the debtor’s financial affairs;
- Examines proofs of claim and objects to improperly allowed claims;
- Objects to the debtor’s discharge where appropriate;
- Provides information requested by parties in interest unless the court orders otherwise;
- Files periodic reports and summaries of the operation of the business, including statements of receipts and disbursements; and
- Provides a final report and files a final account of the administration of the estate with the us trustee and the court.
Distribution of Assets During Liquidation
Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the U.S. Department of Justice overseeing the process. The most senior claims belong to secured creditors who have collateral on loans to the business. These lenders will seize the collateral and sell it often at a significant discount, due to the short time frames involved. If that does not cover the debt, they will recoup the balance from the company’s remaining liquid assets, if any.
Next in line are unsecured creditors. These include bondholders, the government (if it is owed taxes) and employees (if they are owed unpaid wages or other obligations).
Finally, shareholders receive any remaining assets, in the unlikely event that there are any. In such cases, investors in preferred stock have priority over holders of common stock. Liquidation can also refer to the process of selling off inventory, usually at steep discounts. It is not necessary to file for bankruptcy to liquidate inventory.
Corporate Reorganizations
The corporate reorganization definition is something you should know if you are planning to change the tax structure of your corporation, facing bankruptcy, or preparing for a merger or acquisition. Reorganizing your corporation can be beneficial in a number of ways, from increasing profits to gaining protection in tough times. There are several different types of corporate reorganization, with varying purposes, benefits, and challenges.
Corporate reorganization may refer to any of the following:
- A process that has an impact on a corporation’s tax structure.
- The rehabilitation of the finances of a company following a bankruptcy.
- An acquisition, merger, or sale of a company that results in a change in ownership, stock, or management or legal structure.
Types
Type A: Mergers and Consolidations
Tax Almanac reported that the first recognized type of reorganization is a statutory acquisition or merger, wherein consolidations or mergers are both based on the acquisition of the assets of a company by another company.
Type B: Acquisitions: Target Corporation Subsidiaries
A Type B reorganization occurs when a corporation acquires the stock of another company, resulting in the acquired company becoming its subsidiary. It must be executed in a short timeframe, such as 12 months. Also, the acquisition must be the only one among measures that make up a larger plan for acquiring control. This type of reorganization must be performed for the sole purpose of acquiring voting stock.
Type C: Acquisitions: Target Corporation Liquidations
Unless the requirement is waived by the IRS, a targeted corporation is required to liquidate in order to be part of a Type C acquisition plan. Additionally, shareholders of the corporation will become shareholders of the acquiring company.
Type D: Transfers
A Type D transfer is categorized as either an acquisitive D reorganization or divisive D restructuring, which can be a spinoff or split-off. For instance, if Corporation A possesses former Corporation B’s assets and its own assets, Corporation B will go out of business, and the shareholders of former Corporation B will control Corporation A.
Type E: Recapitalizations
In a recapitalization transaction, a corporation’s shareholders exchange shares and securities for new shares, securities, or both. This move involves only one company and reconfigures the company’s capital structure.
Type F: Identity Changes
According to the Internal Revenue Code, a Type F reorganization refers to a change in identity, form, or location of an organization in a corporation. Generally, rules for this type of reorganization apply to a corporation that adopts a new name, changes the state in which it conducts business, or revises its corporate charter.
Type G: Transfers
A Type G reorganization involves bankruptcy by allowing the transfer of a failing company’s assets to a new corporation. The controlled corporation’s stock and securities will be distributed to the former company’s shareholders under the rules for distribution that apply to Type D transfers.
