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Liquidation - What is liquidation?

Liquidation is the winding up of a company, the selling of assets to distribute them depending 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 a variety of debts, depending on investments made into the business by creditors, or loans taken out in growing the business, for example.

Liquidating leads to dissolving the company, and bringing all activity to a close. It is a way for a business that has run out of funds to cover any remaining debts.

Why a company would liquidate

The main reason a business would choose to liquidate their assets is due to insolvency. Insolvency essentially means that a business reaches a point where it is 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.

Insolvency

You may be forced to consider liquidation because 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 is insolvent, you can place the company in control of a liquidator who will then deal with the aspects of the liquidation or 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.

The three kinds of liquidation

While liquidation might seem generally straightforward, there are in fact 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 choose to discontinue the company for a variety of reasons. In this case, members’ voluntary liquidation means that the business is in fact still able to make its payments on time, but it is 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 is not 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.

Compulsory liquidation

In this situation, the company is completely unable to make payments to its debts and the director applies direct to the court to request that the liquidation process is implemented.

The role of the liquidator

The liquidator is brought in to manage the liquidation process. Their main responsibilities are to take stock of the company’s assets and pay, if funds are available, a percentage to the creditors.

An intrinsic part of the liquidator’s role would be to investigate all company affairs should they need to recover any of the company’s assets that have been misplaced or sold at less than market value from the company as the liquidator is at liberty to reverse these transactions.