The liq­uida­tor: com­pe­ten­cies and re­spon­si­bil­i­ties

If the beloved family business is suddenly up to its neck in debt, it can be extremely frus­trat­ing. But the sobering truth is that not every project we care about has a bright future ahead of it. If no in­sol­ven­cy pro­ceed­ings are possible, the last option is often the ter­mi­na­tion of the company and the liq­ui­da­tion of all remaining assets. The process is not automatic, but is taken over by a so-called “liq­uida­tor,” who is familiar with the liq­ui­da­tion of cor­po­ra­tions and part­ner­ships. But what exactly does a liq­uida­tor do?

The liq­uida­tor is the person (natural or legal) who is entrusted with the task of winding up a sole pro­pri­etor­ship, a limited liability company (LLC), or another type of cor­po­ra­tion or part­ner­ship – i.e. to carry out the liq­ui­da­tion. Liq­ui­dat­ing a business involves ending the current business, col­lect­ing claims, con­vert­ing all existing assets of the company into cash (i.e. making them liquid), and then ter­mi­nat­ing them com­plete­ly.

The liq­uida­tor in­de­pen­dent­ly takes care of all liq­ui­da­tion measures, while strictly complying with the ap­plic­a­ble law for the type of cor­po­ra­tion he is dealing with and the laws governing the dis­tri­b­u­tion of the company’s assets. In this process, the liq­uida­tor works on behalf of the company that is being closed – this also implies to judicial and ex­tra­ju­di­cial rep­re­sen­ta­tion of the company.

Liq­uida­tors can be ac­coun­tants, lawyers, or business ex­ec­u­tives, depending on the case and legal re­quire­ments. Generally speaking, they are assigned by the court, by unsecured creditors, or by the company’s share­hold­ers and have a fiduciary and legal re­spon­si­bil­i­ty to all involved parties, including the company being liq­ui­dat­ed, the court, and any creditors. Until the assets of the company are sold and debts are paid off, the liq­uida­tor must make sure the liq­ui­da­tion process runs smoothly from start to finish. In the US, the main types of in­sol­ven­cy pro­ceed­ings that include a liq­uida­tor are the following:

• Voluntary liq­ui­da­tion: This self-imposed dis­so­lu­tion of a company is one that is approved by share­hold­ers and the board of directors when they decide that the company no longer has any reason to remain op­er­a­tional or has no viable future. A liq­uida­tor is there­after appointed to close the company in a pro­fes­sion­al manner.
• In­vol­un­tary liq­ui­da­tion: This is when a company is forced to stop operating because it cannot pay its debts and a winding up order is issued by the court. The liq­uida­tor’s role is to in­ves­ti­gate why the company failed and to deal with its assets and li­a­bil­i­ties.

Liq­ui­da­tion under Chapter 7 of the United States Bank­rupt­cy Code is the most common form of bank­rupt­cy, and it can be either the debtor or creditor who files a petition for a Chapter 7 case to liquidate a company’s assets. Chapter 7 applies when the company doesn’t want any remaining control over the liq­ui­da­tion process and a bank­rupt­cy trustee (liq­uida­tor) is appointed by the court to liquidate the assets of the debtor

Once the liq­uida­tor has been assigned, the next step is that they take control of the or­ga­ni­za­tion’s assets. Through­out the process, the liq­uida­tor is con­sid­ered the “go-to” person who assesses the company’s assets, dis­trib­utes them ac­cord­ing­ly, and manages meetings between the company and its creditors.

The liq­uida­tor is the executive and rep­re­sen­ta­tive body of a company in liq­ui­da­tion. When a company files for Chapter 7 of the US Bank­rupt­cy Code which governs liq­ui­da­tion pro­ceed­ings, they shut down the company. By dis­solv­ing an LLC or cor­po­ra­tion, it means that the company is no longer a legal business entity, meaning you won’t be expected to pay any fees or taxes, or file any more documents. In Chapter 7 bank­rupt­cy, a liq­ui­da­tion trustee (liq­uida­tor) is appointed by the bank­rupt­cy court to take pos­ses­sion of the assets of the business and dis­trib­ute them among the creditors. A company can also choose to file Chapter 11 when it has a realistic chance to stay afloat by pre­sent­ing a plan to re­or­ga­nize and continue business under a court-appointed liq­ui­da­tion trustee.

A Chapter 7 case begins with the debtor filing a petition with the bank­rupt­cy court serving the area where the debtor is located or has his principal place of business or principal assets. In addition to the petition, the debtor must file a summary of all their assets and li­a­bil­i­ties, their income and ex­pen­di­tures, a statement of financial affairs, and contracts and unexpired leases, not to mention a copy of the most recent tax return and tax returns filed during the case (including tax returns that weren’t filed pre­vi­ous­ly). Often, a meeting of creditors is called by the liq­uida­tor to explain why the business has failed and to vote on next steps.

Since the liq­uida­tor ef­fec­tive­ly assumes the role of managing director, he is re­spon­si­ble for running the company’s day-to-day business and ful­fill­ing all its oblig­a­tions. He is also permitted to enter into new legal trans­ac­tions, as long as these serve the liq­ui­da­tion of the company. The col­lec­tion of out­stand­ing re­ceiv­ables from business partners and customers is one of the most important steps in the set­tle­ment process.

At this stage, solid business know-how is needed. The liq­uida­tor’s goal is now to convert all assets that still exist within the company (e.g. buildings, land, machinery, materials) into liquid funds (or into assets that are easily ex­change­able for cash). The aim is to achieve the largest possible bank­rupt­cy estate that works in the interest of creditors and share­hold­ers, which can then be dis­trib­uted in the pre­scribed order.

When a cor­po­ra­tion is liq­ui­dat­ed in the US, a certain order applies for paying back creditors. According to Section 507 of the Bank­rupt­cy Code, secured bond­hold­ers and other secured creditors are paid first due to their binding contract. Next, unsecured creditors are paid: first the ones that are entitled to money (like banks, employees, gov­ern­ment taxes), and then general creditors such as stock­hold­ers. Only when one tier of creditors has been repaid com­plete­ly can the next tier be repaid.

The liq­uida­tor is also re­spon­si­ble for proper ac­count­ing. This includes an opening balance sheet starting at the date of the res­o­lu­tion to dissolve the company, a closing balance sheet at the end of the liq­ui­da­tion process, and regular interim balance sheets for each completed financial year. In addition, he must prepare a liq­ui­da­tion report, showing the current financial position of the company and the progress of the liq­ui­da­tion.

During the liq­ui­da­tion process, the liq­uida­tor is tasked with the job of preparing a final statement of account, which states the amount realized for assets and how it was dis­trib­uted, including receipts, cash payments, legal charges, and the liq­uida­tor’s fees. If the winding up of the company is not concluded within a year of its com­mence­ment, the statement of account has to be filed within two months after the year has been concluded.

In addition to taking control of the business, selling the company’s assets, and dis­trib­ut­ing proceeds to creditors, the liq­uida­tor may also be re­spon­si­ble for keeping the books and records of the closed company. After five years from the date of can­cel­la­tion, the liq­uida­tor may destroy any or all books and records in their pos­ses­sion according to US law.

The last tier to be paid are the general creditors, which mostly consists of company stock­hold­ers, who are further divided into creditors with preferred stock and those with common stock (without voting rights). However, these are only paid if there is any money left over after all the other creditors have been paid in full. If there is no money left after the preferred share­hold­ers are paid, common share­hold­ers aren’t paid. However, this pre­sup­pos­es that all known creditors have already been fully serviced. In the event of a breach, the liq­uida­tor is liable with his own private assets.

Annoying, though sometimes un­avoid­able: If, once a company has been closed and is no longer in the Public Register, it turns out that there are still assets as­so­ci­at­ed with a company (and that these still require ap­pro­pri­ate liq­ui­da­tion measures), a so-called “sup­ple­men­tary liq­ui­da­tion” must take place. In this case, the Court of Justice will take care of the dis­tri­b­u­tion of the assets by way of an of­fi­cial­ly appointed liq­uida­tor.

As a kind of “post-in­sol­ven­cy manager”, the liq­uida­tor has two re­spon­si­bil­i­ties: On the one hand, the liq­uida­tor oversees the proper closing of a company, ensuring that the largest possible outcome in a bankrupt’s estate is reached to benefit creditors and share­hold­ers. On the other hand, the liq­uida­tor acts in the interests of the state by ensuring that former managing directors are no longer able to access the company accounts and therefore have no pos­si­bil­i­ty of un­law­ful­ly putting assets aside. Securing a suitable liq­uida­tor is therefore a very important step.

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