The term "liquidation", when it refers to a company, simply means bringing the affairs of the company to an end and distributing the assets to the shareholders once the creditors of the company have been paid.

In Bermuda, there are two types of liquidation – a members' voluntary winding up (e.g. liquidation by the shareholders) and a creditors' winding up. Today, I will address the former option as the goal is to wind up the affairs quickly and efficiently without the aid of either the courts or a liquidator appointed by the Official Receiver.

The law/rules governing a members' voluntary winding up can be found in the Companies Act 1981 (the "Act") as amended from time to time, a copy of which can easily be accessed by anyone for free, online at www.bermudalaws.bm.

Because a limited liability company has a legal personality of its own, shareholders in the company will not be held liable for debts of the company provided that there are no allegations of fraud or dishonesty.

A liquidator, whose duty is to take complete control of the company and its assets and supervise the winding up, oversees the process. The liquidator must address any claims made by creditors and any payments made to those creditors.

More often than not, creditors are paid via the liquidation of the assets of the company, meaning the conversion of bonds, shares, cars, boats, buildings etc. into cash.

Under the Act, liquidation normally begins with a recommendation from the board of directors that the affairs of the company should be wound up and that a particular liquidator should be appointed to manage the task. I use the word 'be' as this is not a fait accompli until the shareholders (members) have agreed, hence the term members' voluntary winding up.

However, one of the most crucial parts of this whole process is the timing of the submission of documents to the Registrar of Companies. For this reason alone it is recommended that you seek the aid of a knowledgeable lawyer who is very familiar with the process. Penalties can be extreme including fines and terms of imprisonment for particular breaches of the Act.

An example of a situation that may result in a fine is where the required documents are not filed with the Registrar of Companies within the specified time frame. Incorrect disclosures on the declarations provided by the directors may result in a severe penalty. In such cases, there is a real danger that the members' voluntary winding up could quickly turn into a creditors winding up with the Official Receiver and the courts becoming involved.

Once the first step has been taken, and a recommendation has been made to the shareholders regarding the winding up of the affairs of the company, the directors must provide a written declaration stating that the company will be able to meet its liabilities within a period of time not exceeding 12 months from the commencement of the winding up. This declaration must be made within five weeks immediately preceding the date of the passing of the resolution by the shareholders to commence a members' voluntary winding up.

In order to protect creditors, the company is required to advertise the intention to liquidate in the Official Gazette and, thereafter, creditors have 14 days during which to inform the liquidator of any claim they may have.

Provided no claims are made and the assets have been liquidated, they may be distributed to the shareholders.

A liquidator holds a final meeting for the purposes of providing shareholders with accounts, and a general explanation about the process and disposal of the assets of the company. Again this meeting must be advertised in the Official Gazette, and timing is crucial if companies are seeking to wind up before annual government fees fall due.

The liquidator will then notify the Registrar that the final meeting has been held and as long as all of the steps have been completed correctly the Registrar will issue the certificate of dissolution and the company will effectively be dissolved. Liquidators normally retain the books and records of the wound-up company for a period of 10 years.

Attorney Simon Payne is a member of the Insurance Team within the Corporate and Commercial Practice Group at Appleby. A copy of Mr. Payne's column can be obtained on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.