Corporate Liquidation vs. Corporate Dissolving

Corporate dissolution is a critical stage in the winding up of the life of a corporate body and represents the final step of the actual liquidation. Dissolution pursues various mechanisms, which may include voluntary dissolution, dissolution based on prescribed terms under articles of the corporation, administrative dissolution, and judicial dissolution (Bevans, 2006). Situations granting the dissolution of a property include: possible increase of economic or market value challenging the revenue being earned, or loss of value of the corporation to a non recoverable status. Other reasons may include the occurrence of fraud, shareholder deadlock, corporate insolvency, and corporate mismanagement (Bevans, 2006). Before the actual dissolution begins, a proper framework needs to be established to notify all potential creditors to the company of the impending decision. Ordinarily, the notice is given as a legal classifies advertisement in the local newspapers so that creditors can file their claims of any outstanding debts, bills, judgments, and other encumbrances (Bevans, 2006). Hence, corporation undergoing dissolution is essentially in the last stages of the actual property liquidation.

Corporate liquidation is a legal process that aims at bringing the corporate life of an establishment or corporate body to an end. It is essentially a string of processes aimed at terminating the life of a corporation. During liquidation, the assets of the company need to be reconciled in an amicable manner after which creditors claims are settled from the resultant proceeds. "From the date of commencement of the winding up, a liquidator is appointed to conduct the dissolution of the company and company ceases to be a going concern (Hanif & Mukherjee, 2005). The liquidator's role is to realize the assets of the corporation and settle the liabilities of the company. The actual windup up may pursue several strategies, for instance, compulsory winding up by court, voluntary winding up, or winding up subject to supervision by the court (Hanif & Mukherjee, 2005). The exact mode pursued for the actual liquidation will be determined by the impending circumstances faced by the corporation. Some of the most common include: the company applies to the court for wind up after the shareholders of the company pass a special resolution; the creditors to the company may apply for windup when it so happens that the company is unable to sufficiently settle its impending debts; a contributor may also present a petition requesting winding up of the company regardless of whether he or she has fully paid up shares or partially paid up shares; the registrar may also apply for winding up subject to obtaining the previous sanction placed on the company by the central government; and finally, the central government may apply for wind up of the corporation subject to proper inquiries into the company affairs by inspectors (Hanif & Mukherjee, 2005).

Asset handling in corporate dissolution depends significantly on the current status of the preferred stock. Similar to other rights presented by the preferred stock, the certificate of preference forms the main controlling document, which essentially determines the amount to be received by preferred stakeholders (Welch & Turezyn, 2008). However, there are certain scenarios that change the status quo. For instance, in the case of a trustee who holds proceeds from the sale of assets, which earned some proceeds or significant income during the holding time, the preferred shareholders are entitled to earn a proportionate share of the generated income (Welch & Turezyn, 2008).

Asset handling in the liquidation of a corporation is determined by the consolidated values of the assets, shareholders, taxation component, and conditions/nature of liquidation.  The liquidation of the assets may be subject to a special taxation component subject to the circumstances, which may include or exclude the tax at corporate level. Schenk (1985) observes that, "Although there is no corporate-level tax unless the tax on built-in gains applies to a sale within the recognition period, there will be a shareholder-level tax on any disposition of a corporate asset" (p.20). In the event the assets under involuntary liquidation, the subsequent disposition of the asset depends on the market value. In addition, when the assets are involuntarily liquidated , after accomplishment of the transaction, the total amount realized upon disposition of the property is allocated between the shareholders in a predetermined proportion going by fair market values (Cch Tax Law Editors, 2008). There are situations when the corporation owns several assets, which are viewed as different entities forming part of the whole. In the appropriate circumstances , the assets may be treated as single assets provided it is clarity is given using the most appropriate estimates attainable on the basis of all prevailing circumstances that the amount gained is not less than the total gains of the individual assets (Cch Tax Law Editors, 2008)

Treatment of Shareholders

Different standards exist in the treatment of shareholders under corporate liquidation and dissolution. In the event of any occurrence of liquidation, if the shareholder acquires significant stock in the liquidating corporation on different dates or varying prices, the gain or equal loss resulting from each scenario is determined separately (Abrams & Doemberg, 1999). There are also unique conditions in the treatment of shareholder dividends. "Generally, accrued dividends may not be paid out of capital even on liquidation but only the normal dividend sources of surplus or net profits" (Welch & Turezyn, 2008). Moreover, it is critical to note that the actual distribution of a corporation's profits or earnings, which forms a vital entity in the determination of the tax consequences of non- liquidating  distributions does not primarily affect the mode of taxation for shareholders existing under a liquidated distribution (Abrams & Doemberg, 1999). There are also reporting standards to which the stakeholders are required to adhere to in the implementation of the liquidation. In essence, when the Corporation undergoes liquidation the shareholders need to singularly report the resulting distribution of the stock that has been redeemed during the year in which the proceeds from liquidation are received (Schenk, 1985)

In the event of dissolution, different shareholders in the business are bound to receive varying forms of benefits. Existing statute provisions allow the shareholders to draft a working agreement that gives one or more of the existing shareholders significant power that reigns over the others to exercise corporate powers in the event of a deadlock occurring (Jurinski & Zwick, 1999). This statute gives sufficient authority to the implemented shareholder agreement as it provides the identified shareholder with significant rights that can enable him or her to dissolve the corporation single-handedly without the involvement of the partners. This implies that the agreement overrides the other shareholders provided the conditions of the agreement are met as stipulated. Ordinarily, dissolution has the potential of leading to the occurrence of a deadlock among the stakeholders on account of the individual shares wielded by each stakeholder. As a result, a statute is in place to prevent such an occurrence. "The purpose of the statute is to alleviate a fundamental deadlock between two 50% stockholders in such a corporation by removing the need for obtaining a unanimous vote on dissolution and, where dissolution is appropriate, to ensure a fair price and an equitable division of the proceeds between the two shareholders" (Welch & Turezynp.797).