There are many reasons why a company that has been getting by quite seamlessly suddenly ceases to exist, at least in the eyes of the legal system.
Running a business is not easy. The owner(s) always have a lot on their plate, and when things get out of hand even when they did all they possibly can to turn the fate of their venture around, they turn to liquidate the company and call it a day.
So, what is the company liquidation?
Well, as per the opinion of experts associated with finance and economics, liquidation is stopping the daily operations of a business and distributing the assets of the venture to its stakeholders (if any).
The term liquidation can also mean that a company is selling off its poor-performing assets (goods, equipment, and stock of finished products) at a price that is lower than the cost of production, purchase, or market price.
How does it work?
The owners of a company going into liquidation will first appoint a liquidator.
Who is a liquidator?
Well, he or she is the person appointed to sell off all the assets owned by the company that he or she deems fit. Only bank balances and cash are off-limits. He or she is also the person who will terminate the operations of the company before dismantling or dissolving it.
In simple terms, a liquidator arranges for finances by selling the assets owned by a company going into liquidation so that the owners of the venture can pay off its internal as well as external liabilities.
The finances thus raised after selling off the assets owned by the company then will be distributed by the liquidator to various creditors where the secured creditors are prioritised. The remaining finances are then distributed to preferential creditors in the forms of –
- Salaries of employees
- Taxes due to the authorities, etc.
Then unsecured stakeholders are paid off using the remainder of the finances (if any) such as –
- The debenture-holders
- The unsecured creditors and
- The preference shareholders.
Types of liquidation
There are three types of liquidation. They are as follows –
- Voluntary liquidation: This is a form of liquidation not forced upon the company owners due to insolvency. It is a voluntary decision where the board members or the owner(s) of the company choose to liquidate the company when the venture is still solvent in a bid to make payments to its creditors.
- Creditors’ voluntary liquidation: This is a solution chosen by the board members or the owner(s) of the company when they understand that their venture is bankrupt. Here, shareholders will be asked whether or not the company should liquidate. If seventy-five percent of the shareholders say yes, then the company begins its liquidation process.
- Compulsory liquidation: This takes place when the legal authorities order a business to cease its operations after the latter fails to pay up its dues.
Why do it?
Liquidation is the solution or rather the last resort for the owner(s) of a company when they understand that their venture is losing more than it is making – in simple words, it is well on its way to bankruptcy.
What are its benefits?
It has the following benefits in store for the owner(s) of a company that has entered the liquidation phase –
All outstanding dues are written off
Unless the owners of the company gave personal guarantees when they were talking credit from creditors, the same is not liable to repay the debts owed by the company to its creditors when the venture enters in liquidation. In short – debts owed by a business to its creditors are written off as soon as the venture legally, ceases to exist.
Legal proceedings against the company come to grinding halt
Any legal proceedings initiated or running for a while, against the company, will cease as soon as the company begins its liquidation process. Furthermore, creditors won’t be able to take any legal action against the owner(s) of the company as long as no personal liabilities are there in the picture for company debt.
It is one of the best ways the owner(s) of a company can avoid court processes
Owners, by voluntarily choosing to liquidate their venture, can avoid being petitioned or in simple terms, sued by disgruntled creditors. By entering into liquidation phase, the company owners are demonstrating to the public that it was a choice and not the result of legal actions initiated by the hostile creditor(s).
It also renders leases as well as purchase agreements null and void
In case the company that has entered into the liquidation process has outstanding purchase agreements and lease terms, the owner(s) can take a breather. These agreements and lease terms are rendered null and void as soon as the liquidation process starts.
In the end, business people who are planning to enter the company liquidation phase should seek professional assistance from reliable and reputed companies that oversees liquidations and related processes. It is the only way; a business owner can steer clear from additional hindrances.