Liquidation - What is liquidation?
Liquidation is the process of bringing a company to an end. When the process is complete, the business is officially closed and its assets will have been distributed to claimants. The distribution of assets will depend on whether the business is solvent or insolvent.
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Liquidation typically occurs when a limited company has reached a point where, for one reason or another, it has been decided that the business will not continue. In this case, you might consider liquidating your company; which basically means turning your assets into cash.
Turning assets into cash is typically done in order to pay off the outstanding debts of the company. These debts may be from investments made into the business by creditors or loans that had been taken out to enable the business to grow, for example.
Liquidating leads to dissolving the company, and bringing all activity to a close. It’s a way for a business that has run out of funds to cover any remaining debts.
The main reason a business would choose to liquidate its assets is due to insolvency. Insolvency essentially means that a business reaches a point where it’s not able to make necessary payments when they are due. Choosing liquidation converts the business assets to cash, which is then used to make these payments.
You may be forced to consider liquidation if your company is no longer solvent. If the company remains solvent it can still be controlled by the directors of the company, but when it’s insolvent, you can place the company in control of a liquidator who will then manage the liquidation process and winding up of the company.
If the company is deemed insolvent, any remaining assets will be sold in order to pay off any remaining creditors. Any amount remaining after all necessary payments have been made is then distributed amongst any shareholders.
While liquidation might seem generally straightforward, there are three different circumstances under which a company can be sent into liquidation. For each of the types of liquidation outlined below, there is a specific process that must be followed:
Members’ voluntary liquidation
In some cases, the business owner might voluntarily choose to discontinue the company. In this case, members’ voluntary liquidation means that the business is in fact still able to make its payments on time, but it’s the choice of the business owner or partners to wind-up.
Creditors’ voluntary liquidation
This occurs when the director of a company realises that the business isn’t able to pay off its debts and can begin the process of liquidation after conducting a vote with the shareholders. If the majority of shareholders (75% or more) vote to liquidate, then the process can start.
In this situation, the company is unable to make payments to its debts and the director applies directly to the court to request that the liquidation process is implemented.
The liquidator is brought in to manage the liquidation process. They have a variety of powers that enable them to realise or sell the company’s assets and use the proceeds to settle outstanding debts. The liquidator will take control of the business, organise the paperwork, inform the various authorities about proceedings, settle any claims against the company, manage communication with the directors and report on the reasons for the liquidation.
Specific duties of the liquidator will include:
Assessing the company’s debts and deciding which should be repaired in full or in part
Ending any outstanding contracts or legal disputes
Ensuring the company is correctly valued to ensure the maximum return for creditors
Informing creditors of proceedings and involving them in decisions when appropriate
Ensuring funds are fairly distributed to creditors
Compiling a report on the reasons for the liquidation
Dissolving the company