A corporation may be dissolved and its affairs wound up by the proper procedure if all its stockholders consent. In some states a majority is sufficient, and in certain cases even less. Statutory provisions prescribe the procedure in most of the states. The process of voluntary dissolution consists simply of gradually closing down the business by realizing on the assets, and distributing the funds among the creditors and stockholders. This usually involves a vast amount of detail work, such as the transfer of contracts, the sale of parts of the business, the taking of inventories, the making of appraisals, and so on.
Liquidation under Receivership
The receivership in bankruptcy is only a step in the chain leading to the appointment of a trustee under whom the process of liquidation takes place. As already stated, the receivership in equity is sometimes not a process of liquidation but a means of carrying on the business pending reorganization. In case the assets are greater than the liabilities, it may be advisable to effect some sort of reorganization to continue the business. The receiver can continue the business in whatever way the court will permit. Any of its unprofitable and unessential parts may be sold and in this way a partial liquidation may be effected.
With permission of the court the receiver may issue receiver’s certificates to meet immediate and necessary running expenses. The certificates usually have the first claim on the assets. It seldom happens that these remedies are sufficient to put the company on its feet and the receiver in the end will wind up the business by disposing of the assets and distributing the proceeds as instructed by the court.
A receiver is an officer of the court and acts under its instructions. In all dubious matters he can protect himself from liability by procuring an order of court or by refusing to act until authorized by an order of court.
Status of Creditors in Liquidation
Creditors may be divided into two groups—secured and unsecured. Those that have a lien upon some specific part of the assets, such as buildings, machinery, or materials, and holders of bonds are among those whose claims are secured. Trade credits and bank loans often have no other security than the standing of the firm.
If the business has been in a receiver’s hands and receiver’s certificates, have been issued, these may be given priority over all debts except those for taxes. The bondholders are usually given the opportunity to appear and present their arguments for or against the issuance of receiver’s certificates. The court directs the issuance at its discretion.
Preferred and common stockholders receive what is left after everyone else has been paid. If the preferred stock is preferred as to assets, it takes priority over the common stock. Often, however, the preference is only as to earnings, in which case the two stock issues share equally in the liquidation. Directors are prohibited by law from declaring dividends except out of earnings. If it should appear that dividends have been paid out of capital and not out of earnings, the stockholders are liable for any amounts thus paid out to them. If the stock issued is only partly paid, the stockholders are liable up to the amount which remains unpaid.
Accounting for Liquidation