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.

Click here for important legal disclaimers.