AFAR CORPORATE LIQUIDATION: CONCEPT OUTLINE

Introduction

Insolvency refers to the financial condition of a debtor that is generally unable to pay its
liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its
assets. When an individual or a business is determined to be insolvent, creditors may assume control
of the insolvent’s assets in an attempt to protect their interests.

An assignee or trustee is appointed to take over the debtor’s properties on behalf on the
creditor group. The assignee converts the properties into cash and makes appropriate distribution of
this cash among creditors. If any assets remain after claims have been fully satisfied, these assets are
returned to the debtor.

Corporate Dissolution vs Corporate Liquidation

Corporate Dissolution refers to the extinguishment of the corporate franchise and the
termination of corporate existence. It legally affects more the nature and capacity of the juridical
being of the corporation.

Corporate Liquidation refers to the process of converting non-cash assets of a liquidation

corporation into cash and distributing the net proceeds to creditors first and then the remainder to
stockholders. It shall be finished within a recommendatory period of 3 years from the dissolution of
a corporation.

FINANCIAL REPORTS

1. Statement of Affairs
2. Statement of Realization and Liquidation
3. Statement of Receipts and Disbursements
4. Statement of Estate Deficit
 MATRIX OF STATEMENT OF AFFAIRS
ASSETS @NRV LIABILITY SECURED USC WITHOUT FREE ASSETS
(100%) PRIORITY
(%RECOVERY)
CASH - - XX
FSC XX - XX
PSC XX unsecured portion -
+USC without Priority
Total Assets @NRV Total USC Without Total Free Assets
Priority
Less: USC with Priority
Net Free Assets

% Recovery of TUSC without Priority = Net Free Assets / Total USC Without Priority

MATRIX OF STATEMENT OF DISTRIBUTION & ESTATE DEFICIT

Liability Estimated Payment % Recovery or

Dividend %
FSC XX FULL AMOUNT 100%
PSC XX Liability secured + %
(unsecured * %
Recovery of TUSC w/o
Priority)
USC W/ PRIORITY XX 100%
USC W/O PRIORITY XX Liability secured + %
(unsecured * %
Recovery of TUSC w/o
Priority)
SHE (ESTATE DEFICIT) XX 0%
TOTAL ASSET (@NRV) XX = Total Asset @ NRV if
there is an Estate
Deficit

STATEMENT OF REALIZATION AND LIQUIDATION

Total Loss on Realization (Assets @NRV < Assets @BV) x

Less: Total Gain on Realization (Assets @NRV > Assets @BV) x
Equals: Net Loss on Realization x
Add: Liquidation Expenses x
Add: Any Unrecorded Liability x
Net Loss on Realization and Liquidation x
+OSC x
-RE (normally deficit) x
Equals SHE or TA @NRV or Estimated Deficiency to USC without Priority x
 Total Asset @NRV = Total Liability + Total SHE
Estate Deficit = Estimated Deficiency to USC without Priority = TA @NRV
Net Loss on Realization = Total Asset @NRV – Total Asset @BV
Total Estimated Payment to Creditors = TA @ NRV if there is an Estate Deficit

STATEMENT OF REALIZATION AND LIQUIDATION

Assets to Be Realized (beg) Assets Realized
Assets Acquired Assets Not Realized (end)
Liabilities Liquidated Liabilities to be Liquidated (beg)
Liabilities Not Liquidated (end) Liabilities incurred
Supplemental Debits/Charges Supplemental Credits
Net Income Net Loss

*Assuming the problem asks for Cash,beginning or Cash,ending use Basic Accounting Equation:

Cash, beginning xx Cash, end xx

ATBR xx ANR xx
Total Assets, beginning xx Total Assets, ending xx
LTBL (xx) LNL (xx)
SHE, beginning xx SHE, ending xx