Liquidation Explained

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Liquidation is a word that can carry negative connotations. It is also a word that can strike fear into business owners and company staff. Regardless of whether a company faces voluntary liquidation, or conversely compulsory liquidation, it is important that the process of liquidation is comprehensively understood.

Liquidation defined…

When a company cannot afford to pay its debts and becomes insolvent, or when the members of a company determine that its affairs should be brought to an end, liquidation can occur.

Essentially a process by which the business and affairs of a company are brought to an end, liquidation involves the assets (including property of a company) being distributed to creditors in a way that is fair and legally correct.

Reasons why companies are placed into liquidation…

The reasons for a company being placed into liquidation are many and varied. These reasons include, but are not limited to:

  • A company being unable to repay its debts, making it insolvent
  • Company directors wanting the business to avoid trading while insolvent
  • Independent and qualified liquidators being required to fully wind up the affairs of the business
  • The company being dismantled while the interests of creditors, directors and members are protected
  • There being no purpose or benefit to be gained by the company continuing
  • Avoiding problems: if a company ceases trading before problems arise (including the possibility of criminal liability), the effects of insolvency are likely to cause less negative impact
  • Putting an end to high levels of stress that may result when an insolvent business continues to trade.

Purposes of a liquidation…

A liquidation may be inevitable for a company that finds itself insolvent. When a company is in the undesirable situation of insolvency, the business owner needs to be proactive in placing the company into liquidation as soon as possible. This action can help to prevent insolvent trading and its associated hardships.

Business owners need to take this seriously as there are significant risks in failing to place a company into liquidation when it is appropriate to do so. A business owner may become personally liable for debts incurred by the company if the company is insolvent but not placed into administration or liquidation. No business owner wants to jeopardise their personal assets and livelihood.

A liquidator is involved…

When an insolvent company is wound up as decided by its members or creditors (voluntary liquidation), or following the application of at least one of its creditors, is wound up by a court, a liquidator is appointed.

If a court determines that the company should be wound up, the applicant (one or more of the company’s creditors) is required to prove that the business is insolvent. Upon satisfactory fulfilment of this requirement, a liquidator, who is usually specified by the creditor, is appointed. In circumstances where a dispute that exists between shareholders or members cannot be resolved, a court may place a business into liquidation.

Voluntary liquidation allows members to select the liquidators.

The effect of liquidation on a company…

  • When appointed, liquidators take control of all of the company’s assets; if it is still trading, this includes the business itself.
  • The role of the liquidator is such that the liquidator has authority to sell any business in the name of the company.
  • Director(s) of a company lose their power when a liquidator is appointed.
  • The company’s assets will be disposed of by the liquidator who will ensure that the proceeds of the sale are provided to creditors.

Trading while in liquidation…

The decision for a company to trade while it is in liquidation is determined by the liquidator. If they believe that it is in the best interests of the company to continue trading while in this position they may allow this to occur because the business may have the potential to be sold as a going concern or because returns for creditors may improve.

The time taken for liquidation…

There is no set time period in which the liquidation of a business will occur. Some cases are more complex than others and may result in the liquidation process stretching across a number of years. Usually, a liquidator will try to ensure that the liquidation is complete within twelve months.

Of course, all business owners hope never to face liquidation. But, being forearmed is forewarned and an understanding of the process of liquidation can be helpful for business owners as they grapple with the realities of running a business.

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