Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
A Chapter 7 debtor may be an individual, corporation, partnership, trust, non-profit organisation or unincorporated association. Railways, insurance companies and some financial institutions cannot be Chapter 7 debtors.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
A debtor can liquidate in a Chapter 11 case and then use the proceeds to confirm a Chapter 11 plan. For most corporate debtors of any size, a Chapter 11 liquidation is preferable to a liquidation under Chapter 7 of the Bankruptcy Code, because in Chapter 11 the debtor remains in possession, meaning that the debtor’s management and board control the case and the sale process.
In a Chapter 7 case, a Chapter 7 trustee administers the bankruptcy estate.
How are liquidation procedures formally approved?
All sales under the Bankruptcy Code, including sales of substantially all of a debtor’s assets, require bankruptcy court approval under Section 363 of the Bankruptcy Code. Typically, the debtor must show that it has obtained the highest and best bid for its assets through an auction process. In most cases, the debtor will obtain approval in advance of bid procedures, often with a stalking horse bidder already selected. When a stalking horse is used, the bid procedures approved by the court in advance will typically include a break-up fee and expense reimbursement if a higher and better bid is obtained in the sale process.
What effects do liquidation procedures have on existing contracts?
Executory contracts (ie, contracts for which material performance remains outstanding for both sides) can be typically assumed and assigned to a purchaser, notwithstanding anti-assignment provisions in a contract. Major categories of contract that cannot be assigned in contravention of an anti-assignment provision include contracts in the nature of a personal services contract and certain IP contracts.
What is the typical timeframe for completion of liquidation procedures?
The timeline for a liquidation will vary depending on the company, but traditionally takes between 90 and 180 days.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
If a Chapter 7 case is commenced by the filing of a bankruptcy petition, or if the case is converted from a Chapter 11 case where no Chapter 7 trustee has been appointed, then an interim Chapter 7 trustee is appointed by the US trustee from a pre-selected panel of private trustees. A permanent Chapter 7 trustee may be elected at a creditors’ meeting held pursuant to the Bankruptcy Code, where creditors holding at least 20% of the allowable, undisputed, fixed, liquidated, unsecured claims may request and vote in an election (however, insider claimants and creditors with interests that are materially adverse to the other unsecured creditors may not request an election or vote). If no permanent Chapter 7 trustee is elected, then the interim Chapter 7 trustee becomes the permanent Chapter 7 trustee.
A Chapter 7 trustee’s primary obligation is to protect creditors’ interests. The Chapter 7 trustee must:
- locate and collect all property of the debtor’s estate;
- convert the property to cash by selling it following notice to parties in interest and a hearing by the bankruptcy court;
- make distributions to the creditors in the order specified by the Bankruptcy Code; and
- liquidate the estate as expeditiously as possible.
Additionally, to guarantee that its fiduciary obligations are met, among other things, a Chapter 7 trustee:
- investigates the debtor’s financial affairs;
- examines proofs of claim and objects to improperly allowed claims;
- objects to the debtor’s discharge where appropriate;
- provides information requested by parties in interest unless the court orders otherwise;
- files periodic reports and summaries of the operation of the business, including statements of receipts and disbursements; and
- provides a final report and files a final account of the administration of the estate with the US trustee and the court.
What is the extent of the court’s involvement in liquidation procedures?
The bankruptcy court’s principal role is to adjudicate and preside over liquidations in order to ensure that a full and fair auction has been conducted and that the buyer satisfies the requirements of the Bankruptcy Court.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
As a general rule, all creditors play a limited role in a liquidation under either Chapter 11 or Chapter 7 of the Bankruptcy Code, because sales are free and clear of liens and claims, with any liens and claims attaching to the proceeds of the sale, and until the sale and automatic stay remain in effect. In a Chapter 11 case, a creditors’ committee is usually appointed (and retains professionals at the expense of the estate). That body will help to oversee the process to ensure that the highest and best price for the assets is obtained and can intervene in court if necessary. In a Chapter 7 case, a creditors’ committee may be (but rarely is) elected; however, its professionals are not reimbursed for fees and expenses from the estate.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Because a Chapter 7 trustee is appointed to administer the bankruptcy estate, the debtor’s role in a Chapter 7 case is much more limited than in a Chapter 11 case. Unless the bankruptcy court authorises a Chapter 7 trustee to do so, the debtor will not continue to operate its business. A bankruptcy court will authorise the operations of a debtor’s business only if it is in the best interest of the estate and if the operation is consistent with the orderly liquidation of the estate. In a Chapter 7 case, the debtor must:
- attach schedules of assets and liabilities to the Chapter 7 petition;
- provide information regarding the operation of its business; and
- appear at a creditors’ meeting held pursuant to Section 341 of the Bankruptcy Code.
The debtor must also make available its financial statements, income statements, books and records to the Chapter 7 trustee.
Click here to view the full article.