A liquidation agreement is a document that will outline all details related to the end of a business. Such an agreement makes sure things between the company and creditors end fairly. This agreement is signed between two or more than two parties. Mostly these two parties are the liquidating company and creditors of the company, and the type of liquidation is voluntary liquidation.
Just entering into a liquidation contract, however, doesn’t mean it’s the end of the partnership. The partnership ends when all dues are paid and “winding up” is concluded. “Winding up” is when assets are distributed to creditors after asset liquidation and the business or partnership is legally terminated. Aspects of liquidation agreement help prevent conflicts and disputes between partners about money and entitlement.
Liquidation agreement can also sometimes be called Partnership Dissolution Agreement.
When Is Liquidation Agreement Needed?
As we know, voluntary liquidation can be both solvent and insolvent, in the case of a solvent liquidation, two or more partners who want to dissolve the business and want to share the liabilities and assets will get into this agreement. If a partner wants to move out of the business, even then a partnership liquidation agreement can be formed.
This agreement is also needed when a company fails to pay its bills and debts. This is called insolvent liquidation.
Purpose of the Liquidation Agreement
- To help companies which can’t carry on financially
- To help companies which don’t want to continue business
- To help a partner who wants to end a business partnership
- To help a company which wants to distribute its assets fairly
Inclusions in Liquidation Agreement
A liquidation agreement would have an effective date, name of the debtor, name of the creditor, and name of the liquidator. It would have the details of the company including the address and phone numbers. It will have all the asset details, financial statements disclosed by the company, notice of liquidation, and reasons for liquidation. It will have the name of liquidator and details of jurisdiction under which the company’s name is registered.
It is also very important to have different clauses in the agreement that ensures safety and fairness. In the case of many creditors, the agreement will have details of all of them and how they will be paid.
It is important to note that this agreement needs to be filed in a court. Mostly, the court provides a liquidator who can run the liquidation process smoothly.
How to Draft the Liquidation Agreement?
It is advisable that a liquidator or expert’s help is taken while drafting this agreement. When the process of liquidation is followed diligently, the chances of further legal action from creditors decreases. A liquidator holds all the power once the process of liquidation begins.
- The first step is to know all obligations and debts
- Figuring out the value of assets
- Clarity on the clauses
- Define the time period of the liquidation process
- Details of selling assets
- Collect the details of taxes and expenses
- The priority list of creditors
Benefits of Liquidation Agreement
Liquidation helps companies pay their due credits which further reduces the chances of strong legal action against the company by creditors.
- No more debts to pay
- Leases will be canceled
- No legal turf
- Avoid court process
- Enable other employees to claim redundancy pay
- Escape from complete bankruptcy or involuntary liquidation
- Reduced pressure and stress
- Fairness in dividing assets
- Selling of company assets
- Loan accounts must be repaid
- Chances of further legal action
- Employees will be redundant
- Business ceases of exist
- Risk of personal liability
Types of Liquidation Agreement
As mentioned above, liquidation can be of mainly 3 types.
- Members’ voluntary liquidation (MVL): In the case of a solvent company, when the company wants to shut down because of any reason other than outstanding debt issue, the liquidation is called Member’s Voluntary Liquidation.
- Creditors’ voluntary liquidation (CVL): When a company can’t pay its debts, and both the creditor and debtor decide to liquidate, it is called Creditors’ voluntary liquidation.
- Compulsory liquidation: This liquidation is involuntary liquidation. In this case, a company doesn’t decide to liquidate first even when it’s unable to pay the debts, so, the court does. A creditor reaches the court against the company. Creditor after profusely chasing the company for payments, further files a petition in the court.
Key Clauses in the Liquidation Agreement
- About Asset disclosure
- Creditors will be paid priority wise
- Tax disclosure
- Selling objective and strategy
- Dispute resolution
What Happens in Case of Violation?
The liquidation process is managed by the liquidator. It’s the liquidator who sells the assets and distributes money to creditors as per the priority list. But even then, the senior individuals of a company can breach the agreement by not helping liquidator with disclosure of all assets and details of finances.
In case of such a breach, serious action can be taken by the law and criminal case can be filled. Depending on who is on the other side of the breach or who is filling the brunt of it, a complaint can be registered against the culprit.
Sample Liquidation Agreement
Since this agreement is not a very simple process, it is advisable to take an expert lawyer’s help. A liquidator can also make things easy for the company and creditors.
You can download a liquidation form sample here
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