What Happens to the Assets or Property of the Company upon Winding Up - Essay Example

What Happens to the Assets or Property of the Company upon Winding Up? Name: Course: College: Tutor: Date: Business organizations are usually wound up when they are in significant financial difficult. However, sometimes the owners of a business organization might decide to wound up its operation due to certain circumstances. In this case, the company may be solvency thus the value of its assets must be in a position to settle the company’s entire obligation. Upon winding up of the company, a liquidator is usually appointed to liquidate all of the assets and properties of the organization. Incase of a voluntary wind up of a company, the executives of the company are in a position to appoint the liquidator while in compulsory wind up, the appointment of a liquidator is done by the major external stakeholders of the organization including creditors and the government (Kinetica, 2008). Once winding up process commences, disposition of the organization’s assets or properties is usually void and litigation which involves the company is normally restrained. The major duties of a liquidator incase of an insolvent company is to collect all of the companies assets, determine the outstanding obligation of the company and honour the obligation according to the prescription of the law. In other words, the liquidator takes control of all the assets and properties of a business organization being wound up. The liquidator is supposed to utilize the money recovered from disposal of the assets and properties of the company to settle its debts (AllBusiness, 2009). The liquidator has the responsibility to determine the company’s title to property or assets in its possession. Any property or asset which is in possession of the company but supplied under a valid retention of title clause will have to be returned to the supplier. A retention of a title clause is provision in sale of goods contract where the title to the goods sold remains vested in the seller until specified obligation are fulfilled by the buyer. In this case, the company possesses the goods while the seller owns them. In this regard, these assets or properties must be returned to respective suppliers (ASIC, 2009). Besides, assets and properties which are held by the company on trust for third parties do not normally form part of the assets of the company which are available to settle debt obligations. An asset or property is held by an organization on trust whereby there is an arrangement to manage it on behalf of a third party. A trust is established by a settlor who entrusts part or all of its properties to parties of his choice usually referred to as trustees. If a company is acting under the capacity of a trustee, such properties or assets are not owned by the company thus they can not be sold to raise funds for settling the debt obligations of the company. In this regard, the assets and properties held on trust are returned to the settlors (Simon, 1999, p.396). Prior to meeting claims, secured creditors are entitled to enforce their claims against the properties and assets of the company to an extent that they are subject to a valid security interest. Secured creditors are creditors who have benefits of security interest over certain assets of a company. In this regard, the assets are usually utilized as collaterals for the creditors to claim incase the company fails to honour its debt obligation. As a result, in the event of wind up of a company, secured creditors are entitled to enforce their security against the assets of the company. The secured creditor does not compete with unsecured creditors for a distribution on liquidation (The Insolvency Service, 2009). However, secured creditors also have an option to release their security and prove in the liquidation. Nevertheless, only in rare cases do secured creditors release their securities. In this regard, assets of an organization held as collateral by secured creditors must be sold out to raise funds to pay the secured creditors (The Insolvency Service, 2009). Besides, claimants having non-monetary claims against the company may be in a position to enforce their rights against the company being wound up. For instance, a party with a valid contract for the acquisition of a certain property or asset against the company being wound up may be in a position to obtain an order for specific performance thus compelling the liquidator to transfer title of ownership of the property or asset upon the purchase price tender (The Insolvency Service, 2009). An order for specific performance is a court order which requires a party to carry out a specific act as per the agreement of the contract. Order of specific performance is usually utilized to complete a previously established transaction thus protecting the expectation interest of an innocent party to a contract. In this case of winding up a company, parties having non-monetary claims against the company are innocent parties thus they should receive a remedy by court issuing an order of specific performance. In this regard, the liquidator is entitled to collect the remaining amount of money for the contract and transfer the ownership of the assets or properties being claimed to such parties (Ruston, 1980, p.395). After removing all assets and properties which are subject to retention of title arrangements, proprietary claims of others or fixed security, the liquidator is entitled to sell out all of the remaining assets and properties in competitive manner to raise funds to pay out the claims of company stakeholders. Generally, there is a specific order of payment of claims which should be adhered to by the liquidator. Firstly, funds raised from sell of company’s assets and properties should be utilized to pay for the liquidation cost. The liquidation cost includes the remuneration of the liquidators and lawyers, court proceeding expenses among others. Secondly, the amount left should be utilized to pay out preferential creditors. Preferential creditors include all of the creditors who have preferential right of payment upon the company’s wind up such as preferential shareholders (O’Donovan, 1994, p.214). Thirdly, the claims of holders of a floating charge are supposed to be paid if the funds are available. Besides, if there is some amount of money left, the unsecured creditors of the organization should be paid out according to their respective claims. In many cases, a certain portion of assets which could be caught by a floating charge is reserved for the payment of unsecured creditors. Lastly, if some amount of cash is left after fully paying the unsecured debtors, the cash is distributed to the ordinary shareholders of the organization according to their entitlements. After distribution of the all assets, the liquidation process of the company is complete thus the company is dissolved (Koller, 2005, p.287). References AllBusiness. (2009). A guide to business asset liquidation. Retrieved June 4, 2009, from http://www.allbusiness.com/buying-exiting-businesses/selling-a-business-selling/2975883-1.html ASIC. (2009). Winding up a solvent company. Retrieved June 4, 2009, from http://www.asic.gov.au/asic/asic.nsf/byHeadline/Winding-up%20a%20solvent%20company Kinetica. (2008). Memorandum on voluntary and court winding up. Retrieved June 4, 2009, from http://www.kcpartnership.com/resources/publication/Voluntary %20and%20Court%20Winding%20Up%20in%20Singapore.pdf Koller, T. (2005). Valuation: measuring and managing the value of companies. New York: John Wiley and Sons. O’Donovan, J. (1994). The law of company liquidation. ISBN 0455212325: Law Book Co. Ruston, W. (1980). Company law: A concise manual of the law and practice connected With the organization, management and winding up of companies. London: Canada Law Book Company. Simon, G. (1999). Company law. ISBN 1859414265: Routledge. The Insolvency Service. (2009). Dealing with debt: how to wind up your own company. Retrieved June 4, 2009, from http://www.insolvency.gov.uk/pdfs/guidance leafletspdf/howtowindupyourown.pdf Read More