In corporate liquidation, a Statement of Affairs is prepared for the corporation to provide information about the current financial position of the company and aids the trustee in liquidating the corporation. It is prepared under a quitting-concern assumption and presents the classifications of assets and liabilities as follows:
Assets pledged to fully secured creditors – the realizable value of the asset is equal to, or more than the secured claim (secured liability).
Assets pledged to partially secured creditors –the realizable value of the asset is less than the secured claim (secured liability).
Free assets – assets not used as security for the payment of any liabilities and available for distribution to unsecured liabilities. Total free assets - Free assets plus the excess, if any, of the assets pledged to fully secured creditors.
***Net Free assets - is the Total free assets less the Unsecured liabilities with priority.
***Estimated deficiency - Unsecured liabilities without priority less Net Free assets.
***Estimated deficiency rate - Estimated deficiency divide by Unsecured liabilities without priority
Unsecured liabilities with Priority – are liabilities specified in the Insolvency law which must be settled before any secured debts (e.g., administrative expenses of the receiver, accrued salaries, wages, taxes, etc.)
Fully-secured liabilities – the realizable value of the pledged asset is at least equal to the amount of the claim
Partially secured liabilities – the realizable value of the pledged asset is less than the amount of the claim. Every partially secured claim has a secured portion and unsecured portion, the latter being covered by free assets based on a recovery percentage.
Unsecured liabilities without priority – liabilities for which the creditor has no lien on any asset of the corporation. These can be recovered pro-rata by the free assets when there is asset deficiency.
The Statement of Affairs is prepared as the start of corporate liquidation of the company.