Liquidation, sometimes called winding-up, is the process by which a business is brought to an end and its assets and property are distributed to claimants. It’s an event that occurs when a business is insolvent. That means that the business is not able to pay its debts when they come due. As the operations of the company end, the assets that are remaining are used to pay shareholders and creditors based on their claims priority.
Types of Liquidation
The liquidation can occur in the following two forms:
1) Compulsory Liquidation
In the case where a party seeks court intervention to order an insolvent company to dissolve and pay loans, the process is referred to as a compulsory liquidation form. The process aims at forcing the company to liquidate. There are various factors that may make the compulsory liquidation the only option. The company assets are sold. They include the amount of tax the government claims, if total liabilities and debts are higher than the company’s asset value, debts pass their deadlines and company is unable to repay the parties involved.
The compulsory liquidation takes the following process:
• One or more creditors serve a statutory requirement that you pay their dues in twenty-one days.
• On expiry of the served demand time limit, the creditor proceeds to the court and pleas for the company’s closure to be repaid.
• The hearing of the case is heard, in case of success, liquidation is approved. Normally, cases are not predictable when they are heard since they may follow a queue of others in the same court.
• Then the liquidation of the company is served with a notice of case results within fourteen days.
2) Voluntary Liquidation
The voluntary liquidation involves the company directors coming together and plan for the process. A CVL (creditors’ voluntary liquidation) is a process that is designed to allow a company that is insolvent to close voluntarily. A board resolution makes the liquidation decision, but the directors instigate it.
The liquidation takes the following steps.
• The company board’s majority signs a united decision plan to dissolve the company by opting for liquidation.
• The decision is passed to shareholders who conduct a vote. Three-quarters of those involved in voting must agree with the decision for it to proceed.
• Finally, the creditors are given a chance to approve the liquidation in an immediate meeting where they play a role in selecting a company liquidator.
Depending on support weight by shareholders, the liquidation can take one or two weeks. Over 90% support promotes it to take just a single week’s time.
Having wound-up the affairs of the company, company liquidators call a last meeting of the creditors (if it’s a compulsory winding-up), the members (if it’s a members’ voluntary winding-up), or both (if it’s a creditors’ voluntary winding-up). Then the liquidator is required to notify the court and to send the company’s final accounts to the the Registrar. Then the company is dissolved.