There are two business liquidation options in Maryland. The first is to file bankruptcy under chapter 7, which is the liquidation chapter of bankruptcy and the second is to file for a receivership.
Chapter 7 – Liquidation
A business liquidation can occur under chapter 7 bankruptcy. A chapter 7 is filed in Federal court and the business must list all of its creditors and assets, as well as disclose certain transfers that were made within specific time frames before the business filed for chapter 7 bankruptcy. A chapter 7 trustee is appointed by the Department of Justice, United States Trustee’s office to investigate the financial affairs of the business and determine if the business has any assets to distribute to creditors, such as funds in a bank account, inventory, or accounts receivable. All of the business’s assets, which has a broad definition under the Bankruptcy Code, become part of the bankruptcy estate and are subject to the reach of a chapter 7 trustee.
The chapter 7 trustee also has additional powers that arise once the chapter 7 case is filed. The trustee has special avoidance powers, such as the ability to recover preferential transfers made to creditors within 90 days of the filing of the bankruptcy case, and the ability to recover transfers made to insiders that were made within 1 year of filing the bankruptcy case. Insider transfers are certain transfers made to owners of the business, business partners or affiliates of the debtor as well as to their family members. In a business chapter 7, transfers to insiders over $6,825.00 must be listed in the Statement of Financial Affairs which must be filed by the debtor.
The chapter 7 trustee also has the right to recover fraudulent conveyances, which has a statute of limitations of 3 years in Maryland. In order to provide fraudulent conveyance, a trustee must demonstrate the following elements:
- A conveyance;
- The debtor either already is insolvent, or will be made insolvent by the conveyance;
- The existence of a debtor-creditor relationship; and
- Lack of fair consideration.
Once a chapter 7 trustee determines that the business has assets from which a distribution can be made to creditors, the trustee sets a claims bar date by which creditors who wish to be paid from the business liquidation must file a claim with the court. After the bar date, the trustee can object to claims, and then distributes the liquidated assets in accordance with the priority scheme of the Bankruptcy Code.
Due to the additional rights that a chapter 7 trustee has under the Bankruptcy Code to recover preferences and fraudulent conveyances, in some circumstances, business liquidation under chapter 7 bankruptcy may not be the best vehicle to liquidate a business.
Another option for business liquidation in Maryland is to file for a voluntary receivership. Receivership is governed by MD Code, Corporations and Associations, § 3-411, et seq. and Maryland Rules 13-101, et seq.
Similar to a chapter 7 bankruptcy, an officer of the business can file for a receivership in Maryland state court and ask the court to appoint a receiver to liquidate the business assets. Importantly, the business is involved in the choosing of its receiver, unlike a chapter 7 bankruptcy. Once appointed, the receiver must send notice to all creditors and set a claims bar date of no less than 120 days from the date of the notice and prepare a list of the business’s assets and liabilities, as well as a Statement of Financial Affairs. An automatic stay under Maryland state law goes into effect once the court enters an order appointing a receiver subject to certain limitations, similar to the automatic stay available in bankruptcy under 11 U.S.C. § 362. The receiver has the power to assume or reject executory contracts and to sell property. After review of the claims filed by creditors, the receiver can object to claims. Unlike a chapter 7 trustee, a Maryland receiver does not have the right to recover preferential transfers to creditors or insiders.
In a receivership business liquidation, once the receiver has determined all of the assets of the business and allowed claims of creditors, the receiver distributes the assets in accordance with Maryland law pursuant to Maryland Code, Comm. Law § 15-102, in the following priority scheme:
(1) Costs and expenses of the administration of the trust or insolvency proceeding which the court approves;
(2) Wages of an employee and health, welfare, and pension contributions contracted for in place of wages, earned not more than three months before the assignment or institution of the insolvency proceeding;
(3) Lien claims of the State, a county, municipal corporation, or other political subdivision of the State perfected or recorded before the assignment or institution of the insolvency proceeding, and claims of persons having judicial liens on property of the insolvent recorded more than four months before the assignment or institution of the insolvency proceeding;
(4) Unsecured claims of individuals, to the extent of $900 for each individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of the individuals, that were not delivered or provided;
(5) Rent for any interest in real property in the State due not more than three months before the execution of the assignment or institution of the insolvency proceeding;
(6) Charges in connection with the transportation of goods advanced by one common carrier to another on behalf of a consignor or consignee not more than three months before the assignment or institution of the insolvency proceeding;
(7) Taxes not included in paragraph (3) of this subsection; and
(8) Claims of unsecured creditors.
Much like bankruptcy, unsecured creditors fall at the bottom of the priority scheme and often receive little distribution from the business liquidation.
If you have questions about business liquidation in Maryland, please call Steiner Law Group at (410) 670-7060 to schedule a consultation.