Types Of Liquidation
Liquidation derives its name from the process of dissolving or making liquid the assets and liabilities of a company or part of a company
. To liquidate is not always synonymous with bankruptcy, as is commonly believed, nor is it always done under duress. Occasionally, companies liquidate an unprofitable segment of their business in order to create funds for other, more profitable enterprises. Liquidation of a business due to an untenable financial situation falls under two broad categories: voluntary and compulsory.
Voluntary Liquidation
Voluntary liquidation is initiated by the directors of a company when they feel their business is no longer sustainable. If the companys assets are sufficient to pay off its debts, it is called Solvent or Members Voluntary Liquidation. If the companys assets are not sufficient to pay off its creditors, it is called Insolvent or Creditors Voluntary Liquidation. More often than not, this is the type of proceeding that a company embarks on.
Insolvent Voluntary proceedings begin with a meeting with a licensed insolvency practitioner with whom a companys directors work to help them arrange formal meetings with shareholders and creditors. At this meeting, resolutions are passed that appoint the chosen licensed insolvency professional as the company liquidator. The next step is to arrange a meeting with the companys creditors in order to avail them of the opportunity to learn why the company has failed and to recommend an alternative liquidator, should they desire. After this meeting, the chosen liquidator assumes full control of the company and its assets.
Compulsory Liquidation
The process of compulsory liquidation begins when a creditor or a company director obtains a court order, sometimes called a winding-up order, that forces it to terminate business. In the instance of a company director seeking the court order, it must be done as a joint petition by all company directors if there are more than one.
Creditors typically seek a winding up order after a statuary demand for payment has not been met either by question, payment or dispute. If after 21 days, a statutory order remains without a response, the creditor can receive the court order. In the case of compulsory liquidation by a creditor, the creditor assumes all costs for his actions, but is the first creditor considered for payment when liquidation occurs. The winding-up hearing takes place in court.
These are just rough outlines regarding voluntary and compulsory liquidation proceedings and should in no way be considered a guide. If you are facing winding-up proceedings, consult professional consultation.
by: Ashlyn Henry
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