Companies have different assets. When liabilities exceed the assets of the company or there is cash flow or balance sheet insolvency, a company can be liquidated. Winding-up and dissolution can also be used to dissolve a company. Depending on the nature of the liquidation the closure happens voluntary or compulsory. During a liquidation corporate assets must be monetized. Once liquid assets are available, distribution can start. In voluntary liquidations, assets often exceed liabilities and shareholders can benefit from the closure. When the liquidation is the result of an asset-liability mismatch, or a violation of regulatory requirements, creditors can be exposed to haircuts. A haircut is a loss for the customer when liabilities exceed assets, or the claim of a creditor is subordinated.
Creditors in a liquidation should ensure that they have the best possible position when a liquidation begins. Where possible, customers could consider opting for rights in rem, such as a fixed or a floating charge on their agreement before the contract starts. This is not something that can be done post-hoc and therefore only applies for future transactions because the pledge needs to be registered. A standard creditor hierarchy determines the ranking under which creditors receive payment. In a compulsory write down, corporate assets play an important role. Such assets are often sold below its value to accelerate distribution to creditors. Corporate assets such as investment portfolios and real estate often have constraints. Selling bonds before they mature or offering property with a long-term tenancy agreement is not always easy. Additionally, the core duty of a liquidator is to orderly resolve the company, not to execute commercial duties. Hence the reason that third parties are able to benefit from the transaction as well.
With Default Capital Management, we mainly target investment portfolios, non-performing loan packages, real estate and other grouped asset classes. These combined packages have the potential to make a difference when profits are realised and distributed to the creditors. Since such transactions take place outside the liquidation and a fair payment is made to the liquidator to achieve these assets, our customers benefit from both the liquidation as well as the profits rendered via the commercial transactions. Another advantage is that the nature and structure of the transaction does not conflict with principles such as equity and pari passu where creditor groups need to be threated the same and discrimination or prioritization is forbidden.
A liquidator owes a duty to the company and not to the creditors of the company. This means that the estate is the priority of the liquidator. Once the estate is secured, a liquidator will ask creditors to submit their proof of debt and supporting evidence of their claim. The anti-deprivation rule forbids assets from an insolvent company to leave the estate unless instructed by the administrator or liquidator.