The 5 Steps of Company Liquidation
In today’s difficult economic climate, a large number of business owners and company directors are looking to liquidate their company or are being given few alternatives to liquidation.
There isn’t an easy answer to the question regarding the overall process of liquidation as it can vary from company to company, however there are aspects of liquidation that are mostly the same universally.
First of all, there are a few different kinds of liquidation procedures. The type of liquidation a company is considering, or being pressured to undergo, can play a huge role in determining the process that follows.
What is voluntary liquidation? What does liquidation mean …
Voluntary liquidation is when the liquidation process has been petitioned by a company’s directors or members while compulsory liquidation is when the liquidation has been petitioned by the company’s creditors. While a variety of different grounds exist, compulsory liquidation usually occurs when the company’s creditors believe that the company has become insolvent and therefore unable to cover its debts.
In this case, the creditors will petition a court for a liquidation order and must demonstrate to the court that the company is truly incapable of repaying what is owed.
Voluntary liquidation can be started by the company’s shareholders or directors. In this event, the shareholders will appoint a liquidator to take over the process of liquidation. In the event of a voluntary liquidation, it is not necessary for the liquidator to apply to the court.
If the voluntary liquidation is done with a company that is solvent, the shareholders can oversee the liquidation process. Conversely, if the company is insolvent at the point of liquidation, the company’s creditors may apply to the court for an order to hand supervision of the liquidation to the creditors.
So while a voluntary liquidation will sometimes be chosen to keep the process out of the creditors’ hands, it is not always a surefire way of preventing it. While there are other types of liquidation, the two most important distinctions in liquidation are whether or not a company is insolvent and whether or not the liquidation is voluntary.
The general steps of liquidation are as follows:
1. Once liquidation has been decided on, a liquidator will be appointed. In the event of a voluntary liquidation, the shareholders will appoint the liquidator while, in the event of a compulsory liquidation, the court will make an order at the creditors’ behest.
2. The entirety of the company’s assets are collected by the liquidator, including funds that are unpaid on shares.
3. At this point, the liquidator will convert all assets into distributable funds.
4. The liquidator distributes the assets in an order of priority.
First and foremost, funds are taken for the sake of liquidation costs. This includes the liquidator’s fee, the cost of collecting the assets of the company, and any court costs. The creditors are then paid in an order, prioritized by a variety of factors.
When applicable, creditors with so-called floating charges will be unable to enforce their security until the high priority creditors have been paid in full. Unsecured creditors are then paid out of remaining funds.
The effect of liquidation on a company | Insolvency and Trustee …
Surplus funds, if any are available after distributing assets in the order mentioned above, are distributed to the company’s shareholders to partly or fully repay their investments in the company – depending on what is left.
5. The formal process of dissolution is performed.
The time it takes for a liquidation to be completed, from petition to dissolution, can vary dramatically from company to company. A good rule of thumb is that the more complex a company is, the longer liquidation will take. Liquidation is always complicated and can be very lengthy.
While liquidation almost always happens after a company has become riddled with financial difficulties, if it’s possible to liquidate a company before it becomes insolvent, the results will almost always be better for the shareholders.
Whether a company is undergoing voluntary or compulsory liquidation, it’s critical that a company’s directors or members seek expert assistance and/or advice on the liquidation process, from qualified insolvency specialists, before it begins.
Category: Business
