National Liquidators

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Liquidation

33. The type of proceeding referred to as “liquidation” is regulated by the
insolvency law and generally provides for a public authority (typically,
although not necessarily, a judicial court acting through a person appointed for
the purpose) to take charge of the debtor’s assets, with a view to terminating
the commercial activity of the debtor, transforming non-monetary assets into
monetary form and subsequently distributing the proceeds of sale or realization
of the assets proportionately to creditors. Although generally requiring the sale
or realization of assets to occur in a piecemeal manner as quickly as possible,
some insolvency laws permit liquidation to involve sale of the business in
productive units or as a going concern; under other laws that is only permissible
in reorganization. Liquidation usually results in the dissolution or disappearance
of a debtor that is a commercial legal entity and discharge of a natural
person debtor.

34. Around the world, liquidation proceedings tend to be very similar in their
concept, acceptance and application and normally follow a pattern that
includes:

(a) An application to a court or other competent body either by the
debtor or by creditors;

(b) An order or judgement that the debtor be liquidated;

(c) Appointment of an independent person to conduct and administer the
liquidation;

(d) Closure of the business activities of the debtor, if the business of the
debtor cannot be sold as a going concern, and termination of the powers of
owners and management and the employment of employees;
Part one: II. Mechanisms for resolving a debtor’s financial difficulties 31

(e) Sale or realization of the debtor’s assets, either piecemeal or as a
going concern;

(f) Adjudication of the claims of creditors;

(g) Distribution of available funds to creditors (under some form of
priority); and

(h) Dissolution of the debtor, where it is a corporation or some other
form of legal person, or discharge, in the case of a natural person.

35. There are a number of legal and economic justifications for liquidation.
Broadly speaking, it can be argued that a commercial business that is unable
to compete in a market economy should be removed from the marketplace. A
principal identifying mark of an uncompetitive business is one that satisfies
one of the tests of insolvency, that is, it is unable to meet its mature debts as
they become due or its debts exceed its assets. More specifically, the need for
liquidation proceedings can be viewed as addressing inter-creditor problems
(when an insolvent debtor’s assets are insufficient to meet the claims of all
creditors it will be in a creditor’s own best interests to take action to recover
its claim before other creditors can take similar action) and as a disciplinary
force that is an essential element of a sustainable debtor-creditor relationship.
Orderly and effective liquidation proceedings address the inter-creditor
problem by setting in motion a collective proceeding that seeks to avoid those
actions which, while viewed by individual creditors as being in their own best
self interest, essentially lead to the loss of value for all creditors. A collective
proceeding is designed to provide equitable treatment to creditors, by treating
similarly situated creditors in the same way, and to maximize the value of the
debtor’s assets for the benefit of all creditors. This is normally achieved by the
imposition of a stay on the ability of creditors to enforce their individual rights
against the debtor and the appointment of an independent person whose
primary duty is to maximize the value of the debtor’s assets for distribution to
creditors.

36. An orderly and relatively predictable mechanism for the enforcement of
the collective rights of creditors can also provide creditors with an element of
predictability at the time they make their lending decisions and can more
generally promote the interest of all participants in the economy by facilitating
the provision of credit and the development of financial markets. This is not
to say that an insolvency law should function as a means of enforcing the
rights of individual creditors, although there is a clear and important relationship
between enforcement and insolvency mechanisms. The efficiency and
effectiveness of procedures for the individual enforcement of creditors’ rights
will mean that creditors are not forced to use insolvency proceedings for that
purpose, especially since insolvency proceedings generally require a level of
proof, cost and procedural complexity that makes it unsuitable for use in that
way. Nevertheless, effective insolvency proceedings will ensure that where
debt enforcement mechanisms fail, creditors will have an avenue of final recourse
that can operate as an effective incentive to a recalcitrant debtor to pay
a particular creditor.

32 UNCITRAL Legislative Guide on Insolvency Law

D. Administrative processes

37. In recent years a number of crisis-affected jurisdictions have developed
semi-official “structured” forms of insolvency processes, inspired largely by
government or central banks, to deal with systemic financial problems within
the banking sector. These processes have been developed on a similar pattern.
Firstly, each has a facilitating agency to encourage and, in part, coordinate and
administer the process to provide the incentive and motivation necessary for its
development. Secondly, each process is underpinned by an agreement between
commercial banks in which the participants agree to follow a set of “rules” in
respect of corporate debtors that are indebted to one or more of the banks and
may participate in the process. The rules provide the procedures to be followed
and the conditions to be imposed in cases where corporate reorganization is
attempted. In some of the jurisdictions, a debtor corporation that seeks to
negotiate reorganization under this process is required to agree to the application
of these rules. Thirdly, time limits are provided for various parts of the
process and, in some cases, agreements in principle can be referred to
the relevant court for reorganization proceedings to commence under the
insolvency law. In addition, one jurisdiction established a special agency that
has extremely wide powers under its governing legislation to acquire nonperforming
loans from the banking and finance sector and then to impose
extrajudicial processes upon a defaulting corporate debtor, including a forced
or imposed reorganization.

38. Both because these processes are relatively complex and involve the
development of special rules and regulations and because they address particular
situations of systemic failure, they are not discussed in the Legislative
Guide.

Article Courtesy: http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf

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