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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
In a compulsory liquidation, procedures may be initiated if:
- the company has passed a resolution requiring it to be wound up by the court;
- the company does not commence business within a year of incorporation or suspends business for a year;
- the company is insolvent (ie, it is unable to pay its debts as they fall due or the value of its liabilities exceeds its assets);
- the number of members is reduced to fewer than two;
- the court is of the opinion that it is just and equitable for the company to be wound up; or
- a regulator petitions for the winding up of a company over which it has regulatory authority and whose licence or registration has been suspended or revoked.
A company will be deemed unable to pay its debts if:
- a creditor (by assignment or otherwise) to which the company is indebted in the prescribed minimum has served a statutory demand on the company requiring that it pay the sum due and, for three weeks following the demand, the company has neglected to pay the sum or to secure or compound for it to the creditor’s satisfaction;
- the execution of another process issued on a judgment, decree or order – obtained either in the court in favour of any creditor at law or in equity in any proceedings instituted by the creditor against the company – is returned unsatisfied in whole or in part; or
- it is proved to the satisfaction of the court that the company is unable to pay its debts.
Voluntary liquidation Alternatively, a company may be liquidated voluntarily if:
- the shareholders resolve to liquidate the company voluntarily, whether or not the company is insolvent;
- a winding-up event has occurred under the company’s memorandum or its articles provide that the company shall be wound up;
- the company resolves by resolution passed by a majority of at least three-quarters of its members that it be wound up voluntarily; or
- the period fixed for the duration of the company in its articles has expired or is under the supervision of the court.
A regulator can also apply to place a company in provisional liquidation.
No entities are explicitly barred from initiating such procedures.
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?
The primary procedure to liquidate an insolvent company in the Bahamas is either compulsory liquidation or voluntary liquidation.
In a compulsory liquidation, a company is wound up by a creditor of the company if a creditor is owed debts by the company or if the company is unable to pay its debts. The key feature is that, after taking into account the rights of secured and preferred creditors, unsecured creditors can recover equally with other creditors proportionately to the value of their debt, provided that there are sufficient assets to meet their claims. A compulsory liquidation or winding up commences with a petition being presented to the court to wind up the company. The process is then overseen by the court.
A company can also be liquidated voluntarily:
- by majority of its shareholders;
- where the company resolves by resolution to be wound up voluntarily because it is insolvent; or
- based on the articles of association.
A voluntary liquidation commences with the passing of a shareholders’ resolution to wind up the company voluntarily.
A company may also be liquidated voluntarily if a fixed period has terminated or a winding-up event has occurred.
A voluntary liquidation does not require court supervision if the directors of the company have filed a declaration of solvency. However, a compulsory liquidation requires the court to oversee the process and liquidators to file periodic reports with the court. If a declaration of solvency is not filed within the prescribed timeframe in the case of a voluntary liquidation, the liquidator should apply to the court for an order that the liquidation continue under the court’s supervision.
In a voluntary liquidation, a company which carries on a regulated business is required to serve notice of the winding up on the relevant regulator.
A company may also be placed in provisional liquidation for a limited period, where the intention is to preserve and maintain the company’s assets before having the company liquidated.
How are liquidation procedures formally approved?
Liquidation procedures are formally approved either by order of the court in a compulsory liquidation or by resolution of the members in a voluntary liquidation.
In a compulsory liquidation, the winding-up order of the court provides for certain steps to be taken by the liquidator and approved by the court. In a court-supervised liquidation, the liquidator files reports with the court setting out the steps taken in the liquidation. In a voluntary liquidation, a plan of dissolution can set out the steps to be taken in terms of the winding-up procedure.
In both a compulsory and voluntary liquidation, a liquidation committee can be established. In the case of a compulsory liquidation, the committee is established by an application of creditors. In a voluntary liquidation, the committee is established by the shareholders.
The liquidator to report to the liquidation committee and answer its requests through meetings and other agreed modes of communication.
What effects do liquidation procedures have on existing contracts?
Existing contracts may be rescinded by the court when an application is made by the party entitled to the benefit or subject to the burden of the contract. If a contract is rescinded, damages can be recovered as a debt in the liquidation. Otherwise, an existing contract may be continued if it is beneficial to the company’s creditors. Some contracts (eg, contracts of employment) are automatically terminated on liquidation of the company.
What is the typical timeframe for completion of liquidation procedures?
A voluntary liquidation can be concluded within months. However, a compulsory liquidation may take much longer, depending on the value of the assets and any potential litigation arising from the liquidation.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
A liquidator in a compulsory liquidation is appointed by an application made to the court by way of a petition for the winding up of a company brought by:
- the company;
- any creditor or creditors, including any contingent or prospective creditor or creditors;
- any contributory or contributories (ie, every person liable under the Companies Winding-up Amendment Act to contribute to the assets of the company in the event that it is wound up and every holder of a company’s fully paid up shares); or
- a relevant regulator, pursuant to the regulatory laws, which seeks the liquidation of the company and appointment of a liquidator simultaneously.
Provisional liquidator A liquidator can be appointed provisionally at any time after the presentation of a winding-up petition but before the making of a winding-up order, if there is a prima facie case for making a winding-up order and the appointment of a provisional liquidator is in the public interest or necessary to prevent:
- the dissipation or misuse of the company's assets;
- the oppression of minority shareholders; or
- mismanagement or misconduct on the part of the company's directors.
A company may also seek to appoint a provisional liquidator on the grounds that:
- the company is – or is likely to become – unable to pay its debts; and
- the company intends to present a compromise or arrangement to its creditors.
Voluntary liquidator In a voluntary winding up, one or more voluntary liquidators may be appointed by resolution of the company for the purpose of winding up its affairs and distributing its assets. Alternatively, when a voluntary liquidation is commenced in accordance with the company’s memorandum or articles upon the termination of a fixed period or the occurrence of an event, the person designated as liquidator in the memorandum or articles automatically becomes liquidator. If no such person is designated or the person so designated is unwilling to act, the directors can convene a general meeting for the appointment of a new liquidator.
Any person, including a director or officer of the company, may be appointed as a voluntary liquidator.
The appointment of a voluntary liquidator takes effect upon filing with the registrar of the consent to act, unless the voluntary liquidator is designated as liquidator in the company’s memorandum or articles. Where a liquidator is appointed, all powers of the directors, cease unless the company (in a general meeting) or the liquidator approves their continuance.
The voluntary liquidator is responsible for preparing reports and accounts on the conduct of the liquidation and the state of the company’s affairs. The reports provide a narrative description and analysis of the steps taken and, in the case of an interim report, the further steps intended to be taken in the liquidation. The reports must contain the necessary information to enable members to make an informed decision about the company’s financial condition.
The voluntary liquidator’s accounts should include details of:
- the nature of the company’s assets;
- any security over the company’s assets;
- the amount realised on sale of the company’s assets and the estimated realisable value of any unsold assets;
- the nature of the company’s liabilities (including contingent liabilities), the amounts paid in satisfaction of those liabilities and the amount remaining unpaid;
- the nature and amount of the company’s income;
- the expenses of the liquidation;
- the amount of the liquidator’s remuneration; and
- the amounts distributed and available for distribution to members.
The reports must be sent to the company’s members with notice of a general meeting for the purpose of approving the reports and accounts. The voluntary liquidator can also send the reports to creditors whose debts have not been satisfied, if requested to do so.
A voluntary liquidator has the same powers and functions as an official liquidator.
Official liquidator The duties and functions of an official liquidator include:
- collecting, realising and distributing the assets of the company to its creditors and, if there is a surplus, to the persons entitled to such assets in accordance with the Companies Winding-Up Amendment Act; and
- investigating and reporting to the company's creditors and contributories on the affairs of the company and the manner in which it has been wound up.
Official liquidators may exercise the following powers with the court’s permission:
- bring or defend any action or legal proceeding in the name and on behalf of the company;
- carry on the business of the company as necessary for its beneficial winding up;
- dispose of any company property to a person that is or was related to the company;
- pay any class of creditors in full;
- make any compromise or arrangement with creditors or persons claiming to be creditors or alleging to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or for which the company may be liable;
- compromise, on such terms as may be agreed, all debts (and liabilities capable of resulting in debts) and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory, alleged contributory, other debtor or other person apprehending liability to the company;
- deal with all questions relating to the company’s assets or winding up;,
- take any security for the discharge of any call, debt, liability or claim and give a complete discharge in respect of it;
- sell company property by public auction or private contract, with power to transfer the whole of it to any person or to sell the same in parcels;
- raise or borrow money and grant securities over company property; and
- disclaim onerous property.
Official liquidators may exercise the following powers without the court’s permission:
- take possession of and collect the property of the company, taking any proceedings considered necessary for that purpose;
- execute, in the name and on behalf of the company, all deeds, receipts and other documents, using the company seal where necessary;
- prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against its estate, and receive dividends in respect of that balance as a separate debt due from the bankrupt or insolvent and rateably with the other separate creditors;
- draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect in respect of the company's liability as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business;
- promote a scheme of arrangement pursuant to Section 158 of the Companies Winding-Up Amendment Act;
- convene meetings of creditors and contributories;
- engage staff (whether or not as employees of the company) to assist the liquidator in the performance of his or her functions;
- engage counsel, attorneys and other professionally qualified persons to assist the liquidator in the performance of his or her functions; and
- do all other things incidental to the exercise of a liquidator’s powers.
What is the extent of the court’s involvement in liquidation procedures?
In a compulsory liquidation, the liquidator must file reports with the court concerning the steps taken within three months of the winding-up order being issued or as the court directs (at minimum, once a year).
In a voluntary liquidation, the liquidator may apply to the court for an order that the liquidation continue under the court’s supervision, unless the directors have signed a declaration of solvency within the prescribed timeframe.
Where the company has passed a resolution to wind up voluntarily, the liquidator or any contributory or creditor may apply to the court for an order that the winding up continue under the court’s supervision despite the declaration of solvency, on the grounds that:
- the company is or is likely to become insolvent; or
- the court’s supervision will facilitate a more effective, economic or expeditious liquidation of the company in the interests of the contributories and creditors.
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?
Involvement Creditors may be involved in liquidation procedures by joining the liquidation committee which is appointed at the first creditors’ meeting.
Creditors may also be involved by attending creditors’ meetings. These are held in the first instance within 90 days of the winding-up order and thereafter are called as the liquidator sees fit or as otherwise directed by the court.
The court encourages creditors’ involvement in liquidation procedures and must have regard to the wishes of creditors or contributories. It may also call creditors’ meetings and direct that liquidators prepare reports for that purpose.
Creditors and contributories may also call meetings, for which notice must be circulated to all known creditors of the company.
In a voluntary winding up, the liquidator, creditors or contributories may apply to the court for the determination of any questions arising in the winding up. If the court considers that the determination of the question or the required exercise of power is just and beneficial, it may accede wholly or partly to the application.
Prohibited action When winding-up proceedings are commenced, no proceedings may be brought against the company except with leave of the court and a liquidator can apply to stay any pending proceedings against the company.
If an action is pending against the company in a foreign court, the company or any creditor may apply to the court for an injunction to restrain further proceedings. Once a winding-up order is made, any attachment, distress or execution put in force against the company’s estate or effects after the commencement of the winding up is void.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Upon commencement of a compulsory winding up, the directors and other officers of the company remain in office, but cease to have any duties, functions or powers, other than those required or permitted by the statute.
The company ceases to carry on business from commencement of the winding up, although its corporate state and status continue until it is dissolved. Directors’ involvement in liquidation procedures is therefore limited, as the powers exercisable by the liquidator mostly supersede the directors’ powers and liquidators may commence legal proceedings against directors if necessary.
Shareholders Shareholders’ rights are subordinated to creditors’ rights in a winding up.
In a voluntary winding up, shareholders may call contributories’ meetings. Contributories are notified of the winding-up proceedings and have the right to be heard. Where there is a solvent liquidation, a liquidation committee is also appointed at the first contributories’ meeting.
Liquidators report to contributories on the affairs of the company and the manner in which it has been wound up. Liquidators or contributories may convene contributories’ meetings.
Contributories may also be part of the liquidation committee where a company is of doubtful solvency.
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