What is the Liquidation of a Company?

Liquidation of a company is that the process a debt-laden company initiates to finish up its operations and sell its assets so as to repay said liabilities and other obligations. A company is liquidated when it is ascertained that the business is not in any state to continue.

Men shaking handsLiquidation is the process a debt-laden company initiates to wind up its operations and sell its assets in order to repay said liabilities and other obligations. A company is liquidated when it is ascertained that the business is not in any state to continue. This may be due to various reasons such as insolvency (usually the main reason), unwillingness to carry on with the operations, etc.

If the enterprise is bankrupt, the liquidator sells the company’s assets to repay all liabilities. The positive balance after repaying the creditors is then distributed among the company’s shareholders.

 

The liquidator

A liquidator is a private who has been appointed to dissolve the corporate and terminate its operations. This person is responsible for selling the assets to repay the company’s internal and external liabilities.

Process of liquidation

The money raised in this manner is then distributed among various creditors. However, this repayment is undertaken supported a pre-established order. The first preference is given to the company’s secured creditors. The remaining money is then used to discharge preferential creditors, i.e., taxes due to the government, salaries of employees, etc.

Any outstanding amount is then used to compensate debenture-holders and other liabilities secured by a floating charge on all assets. Next, unsecured creditors and preference shareholders are paid off.

 

Finally, if there is a surplus of funds after all the payments mentioned above, they are distributed among shareholders. Meanwhile, in case of a deficit, shareholders are asked to pay up their unpaid share of capital.

 

Kinds of liquidation

Voluntary liquidation: this sort of liquidation isn't forced by insolvency and is voluntarily decided by the owner(s)/member(s) of the corporate. This means that the company is still solvent and can make payments to creditors.

Creditors’ voluntary liquidation: This is often caused when the director/directors realize that the corporate will default creditor payments. Shareholders are asked to vote; consequently, if 75% of the members agree to do so, the company is liquidated.

Compulsory liquidation: The court of law orders the business to terminate its operations and shut down when the corporate is unable to repay its liabilities. 

 

Conclusion:

In summary, liquidation pertains to the method of completing and completely shutting down a company’s operations. After the liquidation process is complete, the said company will cease to exist within the eyes of the law.