Corporate liquidation is a process to wind up and close a company. Assets are collected and realized to ultimately discharge liabilities. The most common reason for corporate liquidation relates to insolvency. However, voluntary arrangements for winding up and forced closure to protect the public interest have distinct procedures for resolution.
Liquidation and insolvency procedures are codified in local acts, rules and laws. Differences exist in civil law and common law jurisdictions. Offshore jurisdictions predominantly use the common law legal system entrusting interpretation of the written rules for conduct. Where financial institutions and offshore banks fail, home state and host state control determine the liquidation procedures and jurisdiction. Furthermore, modified universalism identifies the appropriate jurisdiction in cross-border insolvency procedures.
Offshore bank failure has connotations with liquidation resulting in the dissolution of the company. After the license is revoked, the deposit guarantee scheme ensures swift and orderly payment of insured deposits to qualifying creditors. The administrative procedures to further liquidate a financial institution are laid down in local frameworks. As such, issues can arise when the registration and main license of the financial institution differs from the jurisdiction where wrongdoing is condemned, and territorial proceedings are redundant.
Insolvency and creditor hierarchies are codified in local laws and thus follow the regime of the appropriate jurisdiction. In cross-border insolvencies, courts can choose for single points of entry and multi points of entry to isolate business units or allow for a liquidation from a top down perspective. Assets and liabilities that belong to a business unit can either be transferred to the holding company, or in the business unit. In offshore bank failure, isolation of business units often benefits regular creditors most.
Traditional creditor hierarchies follow the principle of pari passu where equal treatment applies to the hierarchical position. Advance payments are made to qualifying creditors via the deposit guarantee scheme. These insured deposits are paid out shortly after the resolution to maintain confidence in the financial system. Remaining creditors hold unsecured debt instruments. Shareholder equity, subordinated debt and other existing shares are cancelled or transferred into securities for bail-in purposes. The strategy to funnel payments might leave unsecured creditors and shareholders with a haircut on their property. This is similar to traditional insolvency and liquidation procedures which end when assets are insufficient to cover outstanding debts and the company is dissolved.