Liquidation is seen as a formal way in which a limited company is brought to its closure. It is the process of selling a company’s assets to offset the debts owed to creditors and shareholders before it is finally dissolved.

Once a company undergoes this process, it ceases to exist as a legal entity. And if there happens to be an outstanding debt owed by the company,  it will be written off except in a case where the director personally accepts that it is borrowed.

Liquidation only happens when a company has reached its breaking point and has no reason to continue functioning again, only then the decision of liquidating is considered.

When these companies or businesses start converting all of their assets into cash, it is to pay off most of the heavy debts they owe.

This may include the investments done by their creditors or the loans they acquired to help grow their business. Liquidation also leads to dissolving of a company who have no funds left to offset their outstanding debts.

What are the kinds of  Liquidations we have

If you consider liquidating your limited company, the first thing you should have in mind is that there is more than one way to achieve that.

Three types of liquidation pose to achieve the same result but with each, comes a distinct process. Any of the liquidation procedures used to place your company depends solely on its financial position at that time.

#1 Creditors’ Voluntary Liquidation (CVL)

Creditors’ voluntary liquidation can take place when a director sees that the company is insolvent and has little or no chance of getting back on its feet.

The voluntary process takes effect when there are but few other alternatives open for the company. For a CVL process to commence, directors and shareholders will come together to appoint a licensed insolvency practitioner.

Related article  Financial Engineering - Definition, Usages, And How does it work

This licensed practitioner will be of their own choice, so as for them to still be in control as the liquidation process is carried out.

This practitioner then oversees the affairs of the company as it takes control and makes sure every affair is done in an orderly fashion. Whilst the practitioner handles the affairs, the responsibility of his fee will be paid by the Directors.

The fee will be paid from the company’s assets but should the company have insufficient assets available, the payment will have to come from the Director’s accounts.

If the personal funds from the Directors aren’t sufficient either, they will have to apply for redundancy.  A Director whose company finds itself in an insolvent state, and places it in the hands of a liquidator acts responsibly.

The company has several legal obligations that it must follow once it is now insolvent, and one of them is putting the interests of its creditors above it and its shareholders.

This means that the Director should avoid anything that will worsen the state of its creditors by accumulating more debts or going down on its company’s assets.

It is at this point that a licensed practitioner’s advice on the possibility of a CVL will go a long way in the conduct of the Director.

#2 Members’ Voluntary Liquidation (MVL)

In Members’ Voluntary Liquidation, which happens to be solvent, it allows the company in this state to close down when it has reached the end of its usefulness.

This MVL can occur in a situation where the shareholders wish to retire or would like to move into a new phase and want access to the company’s profits.

The good thing about this MVL is the fact that it allows for funds to be collected in a tax-efficient manner. The reason is that funds collected from a company via this MVL are regarded as a capital gain instead of an income. So, it is taken as a Capital Gain Tax rather than an income tax.

Related article  The Concept and Use of Balance Scorecard

#3 Compulsory Liquidation

Sometimes, a company will be liquidated by the court’s order instead of a voluntary process by its directors. This scenario can only happen when one or more of the company’s creditors issue them with a Wind Up Petition.

When this WUP is advertised, it will cause the company’s account to be frozen, so that it prevents their assets from being removed.

This judge will hear the WUP, and if there is no concrete defense, a Wind Up Order will be given and it will force the company to dissolve.

In a Compulsory Liquidation, an Official Receiver will be placed with the task of handling the wind-up of the company to deal with its creditors.

This official Receiver is appointed by the courts, and their duty will be to fish out any company assets for the benefits of outstanding creditors before they formally wind up the company.

Then comes an investigation into the directors’ conduct to know the reason behind the company’s failure.

Why a Company Faces Liquidation

The real reason a company will choose the path of liquidating their assets is when it comes face to face with insolvency.

This insolvency means that the company is at its breaking point, a point where it has no means of making payments as of when due. This is why they choose to liquidate their assets to help them make these payments.

When It’s Insolvency

This can only happen when a company is a no longer solvent. This is because, when the company is solvent it can still be handled by the company’s directors, but whereby it is insolvent, it will be placed under the control of a liquidator. The liquidator carries out every aspect of the liquidation or the dissolving of the company.

Related article  How Business Process Reengineering would influence operational performance?

If a company is deemed insolvent, its remaining assets will be sold off to pay off the creditor’s remaining. Now, when every payment is made, whatever remains from it will be shared amongst its shareholders.

The Role of a Liquidator

A liquidator is invited to manage the liquidation process of a company. They are made to take responsibility for the company’s stock assets and make the necessary payments. If the funds are made available, they present a percentage to the company’s creditors.

An essential part of a liquidator’s role is to make its necessary findings of all the company’s affairs. If they get to recover an asset of the company that was misplaced or sold to the market at a lesser value, the liquidator has every right to reverse such transactions.

Conclusion

If you have decided to walk away from a profitable business and collect all the profits tied to it, liquidating the company will be the answer to your problem due to the accumulation of debts and falling incomes.

However, you must know that whether a company is solvent or insolvent, a major step to take is to seek the advice of a licensed practitioner.

This licensed insolvency practitioner helps to discuss the options, giving useful details of every pros and con, and making an expert recommendation of how you should go about it.

In a situation where your company is found to be insolvent, it means that you should cease operating immediately to protect your company assets and save your creditors from more losses.

It is only the advice of a licensed insolvency practitioner that will ensure if there will be a continuity of the company’s trade.