"If you don't drive your business, you will be driven out of business." - B.C Forbes

One of the first things that a business, accounting or law student learns is the principle of a going concern. Businesses, whether sole-proprietorships, partnerships or companies, are assumed to operate as going concerns, which is a simple way of saying that such enterprises are expected to continue as ongoing business entities with an indefinite life unless or until circumstances develop to alter their normal life as a business entity.

The sole-proprietorship is a business that is owned by a single owner. Sole-proprietorships normally continue as going concerns until the sole owner dies or sells the business to another sole proprietor. A partnership normally has several owners (frequently referred to as partners) and is expected to continue as a going concern unless it is dissolved, either by a deliberate decision to do so or by the death of one of the partners.

These two types of businesses - the sole-proprietorship and the partnership - are owned by individuals who are normally actively involved in the business. The ownership of such business enterprises is not normally evidenced by the existence of common stock. Hence, the ownership of the sole-proprietorship or the partnership is not as easily transferable as in the case of a company, the ownership of which is evidenced by shares or stock in the company.

The year 2015 will long be remembered as the year that The Bahamas experienced its largest liquidation in recent memory, namely the liquidation of Baha Mar Ltd. Liquidations have dotted the business landscape over the years, but arguably the liquidation of Baha Mar will be recorded in the annals of Bahamian history as the most spectacularly significant and inescapably impactful liquidation that has ever arisen here.

Therefore, this week, we would like to Consider this... Why do companies go into liquidation, and what are the important considerations regarding this activity? In part two of this series, we will examine the duties, powers, and responsibilities of the liquidator. In part three we will examine the impact that liquidations have on the economy and address the difference between liquidations and receiverships.

The liquidation decision
The decision to place a company in liquidation should never be taken lightly, primarily because such a decision is anathema to the going concern principle. In a very real sense, liquidations signal the beginning of the end of the business enterprise.

The laws that specifically addresses liquidations are The Companies (Winding Up Amendment) Act, 2011, which came into effect on December 30, 2011; and The Insolvency Practitioners' Rules, 2012, which became effective on July 31, 2012.

The Companies (Winding up Amendment) Act, 2011
This act amends the Companies Act and repeals and replaces part seven of that act. This act deals with both the voluntary and involuntary winding up of companies, which can be compulsorily ordered and supervised by the court.

There are instances in which a company can deliberately choose to go into liquidation on its own.  The company can decide to be voluntarily wound up either (i) by virtue of a corporate resolution that confirms its decision to do so for whatever legitimate reason it chooses; or (ii) by events that have arisen by which the company's articles of incorporation have prescribed that the company should be wound up; or (iii) if a fixed period for the duration of the company has expired.

Involuntary liquidations normally arise if a company is insolvent; that is, if it is unable to pay its debts as they fall due or if the value of the company's liabilities exceeds its assets. In either case, because of these developments, the company is no longer considered a going concern because it no longer has the ability to continue to operate in the normal course of business.

Provisional liquidators
The act provides for the appointment of a provisional liquidator or joint provisional liquidators before conclusively determining whether the company should be liquidated. The court would normally accomplish this by issuing an order for the appointment of provisional liquidators if a compelling case can be made that such appointment would mitigate the dissipation or misuse of the company's assets, or to prevent the oppression of minority shareholders by the majority shareholders, or to prevent mismanagement or misconduct on the part of the company's directors, or if such appointment is in the public interest.

The court would normally appoint provisional liquidators for a relatively short period of time under such terms and conditions that it might articulate in order to maintain the value of the assets that are owned or managed by the company. The remuneration of the provisional liquidator is also fixed by the court.

The provisional liquidator is appointed until such time that the court can receive a report from the provisional liquidator that would support the decision to wind up (liquidate) the company.

Official liquidators
Once the court has determined that a company should be placed into liquidation based on the report of the provisional liquidator, a winding up order is granted, an official liquidator is appointed by the court and the official liquidation of the company commences.

The court has the power to appoint one or several (joint) liquidators as well as to establish the remuneration of official liquidators. In most cases, the court appoints the provisional liquidator as the official liquidator. The act also gives the court the authority to specify the conditions relative to the qualifications duties, functions and powers of official liquidators as well as addressing reasons for their removal.

Secured creditors
The act provides for a secured creditor, such as a bank, to be able to enforce his security over the whole or part of the assets, (such as a foreclosure), without the permission of the court and without reference to the liquidator. Therefore, if a lender has a secured liability from the company that has been placed into liquidation, the creditor has the ability to take control of the underlying asset for which the loan was originally granted without obtaining permission from either the court or the official liquidator.

This is essentially what the Export-Import Bank of China (CEXIM Bank) has done with respect to the secured position that it enjoys with Baha Mar. CEXIM Bank has recently arranged for court-appointed receivers to enforce the bank's rights under its mortgage agreement with Baha Mar in order for the receivers to take possession of the underlying asset with a view to completing the collateralized asset, principally the resort development.

The receivers will work along with the court-appointed joint provisional liquidators. The latter will have carriage of the liquidation exercise in the interest of the unsecured creditors, Baha Mar shareholders and other stakeholders, all under the supervision of the court.

Insolvency Practitioners' Rules 2012
The Insolvency Practitioners' Rules apply to every appointment of an official liquidator made by the court. They clearly delineate the professional requirements of the official liquidator including, inter alia, that he has "relevant experience" to act as an official liquidator as defined by the rules and must be a person who is solvent and in good financial standing.

The official liquidator must be resident in The Bahamas, although there are also provisions for the appointment of foreign liquidators. In addition, the liquidators must be independent of the company that is to be wound up and must have the mandated professional indemnity insurance in place at the time of his appointment.

Conclusion
Next week, we will examine the duties, powers, and responsibilities of the liquidator with specific examples of steps that must be taken once a liquidator is appointed. The role of both the provisional and official liquidators of Baha Mar is vitally important to the Bahamian economy, because the well-being of so many Bahamian and non-Bahamian employees and creditors are owed substantial sums for their work on the project and critically depend on the decisions and conclusions of liquidators.

It would not be an exaggeration to assert that the future wellbeing of thousands of Bahamian families is held in the hands of the provisional and official liquidators. Therefore, it is vitally important to fully understand what we should expect from them so that we will be better able to hold them accountable for their judgments, decisions and evaluations.

o Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.

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