5. To suffer or permit, while insolvent, any creditor to obtain preference through legal proceedings and not have vacated such preference at least five days before the sale or final disposition of the property affected by such preference.

After the petition has been presented the next step is the appointment of a receiver or trustee for the purpose of protecting the creditors, and also in the case of the individual to secure the application of his property to the settlement of his debts so far as possible and so secure for him a discharge from further liability.

Bankruptcy proceedings are regulated by the National Bankruptcy Act of 1898. The courts of the Federal Government have jurisdiction in these proceedings. Under the National Bankruptcy Act, a person is insolvent “when the aggregate of his property, exclusive of any property that he has conveyed, transferred, concealed or removed, or permitted to be removed with intent to hinder, delay or defraud his creditors, is not, at a fair valuation, sufficient in amount to pay his debts.”

Voluntary Dissolution. A corporation may or may not be insolvent when making a voluntary dissolution. The reasons for the decision on the part of the stockholders to take this step may be various. Perhaps business is falling off and further profitable use cannot be made of the capital, or the company while solvent is losing money and drawing on its surplus. Again the cause may be due to legal complications, especially when concerns are adjudged combinations in restraint of trade. Voluntary dissolution in general is due to the fact that the condition of affairs seems to be unprofitable and the near future promises nothing better.

Receivership. One method of liquidating an insolvent corporation is by means of a receivership. The appointment of a receiver in equity is different in purpose from that of a receiver in bankruptcy. The function of the receiver in equity is to continue the business until it is wound up. In bankruptcy proceedings a receiver is appointed temporarily to preserve the property until a trustee can be elected. He does not conduct the business, but merely takes care of the goods, and pays taxes and dues, until the election of the trustee. A receivership in equity is frequently a preliminary step to reorganization. While the concern is technically insolvent in that the quick assets are not sufficient to meet maturing obligations, the total assets really exceed the total liabilities. Were the fixed assets sold, only a small fraction of their value might be realized. Under these circumstances the appointment of a receiver in equity is a valuable measure, giving time to provide for permanent remedies.

Liquidation under Bankruptcy

In involuntary bankruptcy proceedings the creditors file a petition in the federal courts located in the judicial district where the bankrupt has his place of business or in which his property is located. A copy of the petition is served on the bankrupt. The petition generally asks for the appointment of a receiver to protect the property until a trustee can be elected. The receiver is appointed by the court and is given charge of all property of the bankrupt until the first meeting of the creditors. The proceedings are generally conducted before a referee in bankruptcy appointed by the court. After the expiration of 20 days, during which the bankrupt is allowed to make his reply, he is required to file a list of all claims against him. A meeting of all creditors whose claims have been allowed by the court is then called and, if the petition is granted, a trustee is elected. Creditors who have some security for their claims are not allowed to vote for the trustee unless the security is insufficient to cover their claims, in which case they may vote on the amount of claim which is unsecured.

As soon as the trustee has been elected the creditors should file their claims with him together with the proof of the claims. This may consist of an affidavit stating the nature and amount of the claim, and the security held, if any. The bankruptcy proceedings are carried through unless the creditors and debtor agree to compromise.

The trustee’s first duty on his appointment is to collect all the property and any debts owing to the bankrupt, and to turn everything into cash in as short time as possible without unduly sacrificing the assets. As a general rule it is necessary to keep the business going for some time in order to get the most out of it. From the receipts the trustee pays taxes, filing fees, court costs, attorney’s fee and wages due, and then the creditors. Servants and persons employed for three months prior to the bankruptcy proceedings are entitled to be paid before any other claims are settled. After that the secured debts are discharged to the value of the security. When these items have been paid, if there remains enough to pay 5% of the total amount of all other claims, the creditors are entitled to have a dividend declared within 30 days after the debtor has been adjudged a bankrupt. If not, they must wait until the trustee has collected a sufficient amount. Afterwards the creditors are entitled to dividends from time to time until the entire amount in the hands of the trustee has been paid out. When the final dividend has been paid the trustee makes up his accounts, presents them at court, and asks for a discharge. He then is entitled to his fee based on the value of the funds that have gone through his hands.

Liquidation under Voluntary Dissolution