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Liquidator: Definition – Role – Powers – Example

What Is a Liquidator?

LiquidatorA liquidator is a specialist who administers the winding up of a company, paying off creditors and distributing the remainder to shareholders.  In general terms, it refers to a person or entity that liquidates something—usually assets.  Assets are liquidated by selling them on the open market for cash or other substitutes of value. The liquidator has the legal authority to act on behalf of the firm in a variety of roles.

A court-appointed liquidator is an officer who is particularly commissioned to wind up the affairs of a corporation.  This usually occurs when the firm goes bankrupt or is financially insolvent. Under these circumstances, a company is forced to stop operating because it cannot pay its debts.  The liquidator sells a company’s assets, and the proceeds are used to pay off the company’s obligations. A liquidator may also be named as a bankruptcy trustee in various jurisdictions. A liquidator has the legal ability to liquidate a company’s assets as well as file and defend litigation on its behalf.

Role of the Liquidator

A liquidator has the legal right to liquidate a company’s assets before it ceases operations entirely.  Primarily, it is to raise revenue for a number of purposes, including debt repayment. In most cases, liquidators are appointed by the court, unsecured creditors, or the company’s shareholders. They are frequently engaged when a corporation declares bankruptcy. Once appointed, the liquidator will seize control of the person’s or organization’s assets. These are then collected and sold one by one. The profits of the sale are then utilized to pay off the existing debt owed to unsecured creditors. One of the primary responsibilities of many liquidators is to file and defend litigation. Other measures include collecting outstanding receivables, paying off bills and debts, and completing any remaining corporation termination processes. A liquidator has the legal ability to liquidate a company’s assets, defend litigation, and initiate lawsuits.

Liquidator – Qualifications

Depending on the situation and legal demands, liquidators might be accountants, attorneys, or business executives. In general, they are appointed by the court, unsecured creditors, or the business’s owners.  They have a fiduciary and legal obligation to all parties involved.  This includes the company being liquidated, the court, and any creditors. The liquidator must ensure that the liquidation process works properly from start to finish.  Their responsibility endures until the company’s assets are liquidated and debts are paid off. The following are the most common forms of insolvency procedures in the United States that include a liquidator:

  • Voluntary liquidation – This is a self-imposed dissolution of a corporation that is approved by shareholders and the board of directors.  It happens when they determine that the firm can no longer continue operating or has no sustainable future. Subsequently, a liquidator is hired to close the firm in a competent way.
  • Involuntary liquidation – This is when a corporation is compelled to cease operations due to the inability to pay its obligations.  Under these circumstances, the court issues a winding-up order. The duty of the liquidator is to determine why the firm collapsed and to deal with its assets and obligations.

Liquidator – Powers and Duties 

The authority and powers of a liquidator are determined by the jurisdiction and regulations that oversee the function. In some cases, the liquidator may be given entire control of the firm until the assets are liquidated and all debts are paid off. Others are permitted privileges while yet being monitored by the court. The liquidator owes a fiduciary and legal duty to all parties, including the corporation, the court, and the creditors. He is often seen as the go-to person when it comes to making decisions concerning the firm and its assets.  Further, the liquidator must maintain control of the assets and ensure they are correctly valued and distributed when sold.  He must handle all communication and meetings with creditors and the firm in question.

The liquidator has a host of powers at his disposal. Overall, it is his sole responsibility to ensure that the liquidation process runs well. The primary task is to turn any residual firm assets or property into cash in order to repay as many creditors as possible. He or she will have to examine the director’s conduct and organize meetings with creditors and directors.  This is in conjunction with a variety of administrative chores and paperwork.

For example, many retail merchants go through liquidation in order to dispose of their assets in the event of a bankruptcy. The liquidator evaluates the company and its assets and then decides when and how to liquidate them. New inventory shipments will be halted, and the liquidator may prepare to sell existing inventories. Everything associated with the retailer, including furnishings, real estate, and other assets, will be auctioned. The funds will then be prioritized, organized, and distributed to the creditors.

Liquidation Process

Liquidators aren’t always involved in the liquidation process. Voluntary liquidation is a company’s self-imposed winding up and dissolution agreed upon by its shareholders. Such a decision will be made when a firm’s leadership determines that there is no reason for the company to continue operating. In other situations, the corporation may choose to handle the procedure on its own.

  • Members Voluntary Liquidation (MVL) – This is the point at which the corporation is solvent and can pay all of its creditors in full. Directors commonly decide to use the MVL option for tax considerations or to restructure the firm. In this case, the necessary resolutions must be enacted in a general meeting in order to wind up the company.  This is where the company may choose to handle the matter themselves or appoint a liquidator.
  • Creditors’ Voluntary Liquidation (CVL) – This occurs when directors make the voluntary choice to liquidate the firm in the face of an insolvent corporation.  Usually, the firm is unable to pay its creditors in full. The board of directors decides to shut the company and start again. In this case, the procedure is launched by the board of directors rather than the company’s creditors.
  • Forced or Compulsory Liquidation – In this case, the creditors appeal to the court to dissolve the firm. The creditors no longer believe the firm can pay them back.

Liquidator Example

Marka, the UAE retail and leisure firm, was declared bankrupt by a local court, and all of its assets have been liquidated. The court judgment also demands board members to pay Dh448 million to creditors, which applies to all Marka subsidiaries. According to a Dubai court judgment, the business’s management and directors have been deprived of any authority over the company or its subsidiaries. Creditors filed an action against Marka, which had gone through a tremendously successful IPO and was listed on DFM at the time. Directors and managers are not permitted to manage or dispose of the company’s cash, pay off claims, or borrow money in its name. Furthermore, they must turn over all firm cash and documentation to the court-appointed bankruptcy trustee within five days of the ruling’s date.

A court in the UAE may require the directors, jointly or not, to pay all or part of the company’s debts under Article 144 of the Bankruptcy Law.  This applies in circumstances where they are found liable for the company’s losses under the Commercial Companies Law. This provision further applies when the company’s funds are insufficient to cover at least 20% of its debt exposure. (Source: gulfnews.com)

Frequently Asked Questions

How Is a Liquidator Paid?

Liquidators charge fees for their services.  Costs vary based on the size of the company, the complexity of the case, and the amount of time required to accomplish the work. In the case of bankruptcy or liquidation, the Insolvency Act of 1986 establishes the absolute priority (also known as the liquidity preference) with which stakeholders are compensated. According to the law, liquidators’ fees and expenses must always be paid first. Following that, payments are distributed to senior secured creditors, unsecured and subordinated creditors, preferred shareholders, and finally common shareholders.  In a formal insolvency procedure, each class of creditors is paid in full before funds are assigned to the next tier or to a lower-level obligation.

What is the Difference Between a Liquidator and a Receiver?

The main differences between a liquidator and an official receiver are not the roles themselves.  It is the insolvency procedures that they administer and manage.

  • A liquidator is appointed by the directors in a Members Voluntary or a Creditors’ Voluntary Liquidation.  This allows the directors to retain an element of control over the process.
  • An official receiver is appointed as liquidator by the Court when a winding-up order has been granted.  For example, the result of a creditor(s) forcing a company into compulsory liquidation. However, the court-appointed receiver may seek the services of a liquidator if he or she believes it is required by the complexity of the case.

Up Next: What Is Smurfing in Finance and Banking?

SmurfingA smurf is an insider term for a money launderer who tries to avoid detection by government agencies. Smurfing is the practice of dividing big transactions into smaller ones that are individually below the reporting threshold. Smurfing is a criminal offense with significant repercussions. Current banking rules compel banks and other financial institutions to file a suspicious activity report (SAR) for cash transactions over $10,000.  Banks are also required to report any other transactions deemed suspicious.

A Suspicious Activity Report (SAR) is a document that financial institutions must file with the Financial Crimes Enforcement Network (FinCEN).  Banks and associated institutions are required to disclose when there is a suspected case of money laundering or fraud. These reports are instruments for monitoring any conduct in finance-related businesses that are judged unusual, a prelude to unlawful action, or may endanger public safety.

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