Aside from liquidation, read also: RIGHTS OF STOCKHOLDERS IN A DISSOLVED CORPORATION
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Liquidation is the opposite of Rehabilitation
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Liquidation allows a corporation to wind up its affairs and equitably distribute its assets among its creditors
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A rehabilitation proceeding may be converted into one for liquidation
Mismanagement of business assets and liabilities may lead to financial distress.
Financial distress is a condition in which a company or individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations. In the present time, financial distress is undeniably one of the effects of Covid 19-Pandemic which affected the production and demand of goods and services.
In our previous article, we discussed that business closure is not an option. Also, we have tackled the possible remedies in saving a business. If a business is owned by an individual, suspension of payments is a remedy. If a business is owned by a corporation, it may choose any from the three kinds of rehabilitation proceedings. However, there are instances where rehabilitation is not feasible.
In one case, the Supreme Court denied the Petition for Corporate Rehabilitation on the ground that the assets of the corporation are non-performing. The corporation failed to show that it has enough serviceable assets to be able to continue its business. The corporation should have opted for liquidation as opined by the Supreme Court.
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because “assets…are often more valuable when so maintained than they would be when liquidated”. Rehabilitation assumes that assets are still serviceable to meet the purposes of the business. However, if there are instances when corporate rehabilitation can no longer be achieved and when rehabilitation will not result in a better present value recovery for the creditors, the more appropriate remedy is liquidation.
Liquidation allows the corporation to wind up its affairs and equitably distribute its assets among its creditors. To quote “It does not make sense to hold, suspend, or continue to devalue outstanding credits of a business that has no chance of recovery. In such cases, the optimum economic welfare will be achieved if the corporation is allowed to wind up its affairs in an orderly manner”.
In liquidation, corporations preserve their assets in order to sell them. Without these assets, business operations are effectively discontinued. The proceeds of the sale are distributed equitably among its creditors.
The law says:
A Petition for liquidation may be filed with the court by either an insolvent debtor (voluntary liquidation), or creditors (involuntary liquidation). Also, at any time during the pendency of or after a rehabilitation court-supervised or pre-negotiated rehabilitation, the court may order the conversion of rehabilitation proceedings to liquidation proceedings.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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