Liquidation is the official dissolution or ‘winding up’ of a company.
There are several types of liquidation, which reflects the different ways liquidation can be applied to companies with different financial circumstances. The liquidation process involves the orderly winding up of a company’s affairs including realising the company’s assets, ceasing or selling operations, distributing the realisation’s proceeds among creditors and distributing any surplus among shareholders. And even though these actions are typically associated with companies that cannot resolve its debts, liquidation can be applied to both solvent and insolvent companies.
For example, a director might need to liquidate their company because it can no longer borrow money or obtain credit to continue operating. Sometimes the company is no longer economically viable because of rising operating costs, or directors may see fit to de-register to their company because it is dormant or has worn out its use.
Different types of company liquidation
Creditors’ Voluntary Liquidation.
This type of liquidation is the most common for insolvent companies, or companies that have commitments to creditors but can no longer pay its debts. The process is designed to help successfully realise and liquidate company assets to satisfy creditors’ needs and kicks off when company shareholders voluntarily agree to liquidation, or when creditors agree to proceed with liquidation as a result of voluntary administration. Creditors’ Voluntary Liquidation is especially important for insolvent companies because trading while insolvent is against the law. Electing to liquidate voluntarily is often the most efficient way to dissolve an insolvent company as it facilitates orderly asset sales to meet the demands of the company’s creditors. Directors who wish to avoid the penalties from not enacting their duties to respond to insolvency are likely to pursue this option rather than waiting for a court order.
Members’ Voluntary Liquidation.
This Members’ Voluntary Liquidation process results from an agreement by company members to dissolve a solvent company. This type of liquidation is done for a number of reasons and does not always stem from debts or financial hardship. Perhaps a company has simply reached the end of its usefulness or the directors and members have agreed to go their separate ways. Members’ voluntary liquidation appointments are commonly made as part of the simplification of a group of companies to save on administration costs or to obtain tax benefits when distributing past profits to shareholders.
Liquidation can be ordered by the courts, which occurs when creditors lodge a request to courts in order to settle company affairs when they deem a company insolvent. Creditors must be able to verify a company is insolvent before involving the courts, but often do so when they lose confidence that debts will be paid or that a company director is taking their insolvency situation seriously. Court Liquidation involves a court-appointed liquidator to administer the process. The liquidator will thoroughly research the company’s financial affairs, and distribute assets appropriately. They will also ascertain whether or not illegal or improper activities have taken place.