Written by Liquidation is a process that every business owner would prefer to avoid.
However, it is a harsh reality that businesses face when they are unable to meet their financial obligations.
Liquidation refers to the process of closing down a business and selling off all of its assets to pay off its debts.
It is the process of bringing a business to an end or winding up a business.
Liquidation is also the closing of a business and distributing its assets to claimants or creditors.
It is typically done when a business is insolvent or unable to pay up its debts.
During the liquidation process, the assets of the business are sold and proceeds from the sale are then used to pay off the debts owed to the creditors.
Once all the assets have been sold and the debts have been paid off, the business will cease to operate.
This means that the business can no longer engage in any commercial activities and any legal or contractual obligations it had before the liquidation process would be considered null and void.
Liquidation can be voluntary or involuntary.
Voluntary liquidation occurs when shareholders or owners of a business decide to liquidate the business because the business is no longer profitable or because the owners want to retire the business.
Involuntary liquidation, on the other hand, occurs when a court orders a business to be liquidated because the business is unable to pay its debts or because there are legal disputes that cannot be resolved.
It is important to note that liquidation is not the same as bankruptcy.
In a bankruptcy, a company may be given the opportunity to restructure its debt and operations under the supervision of a court-appointed trustee. Thus, a company may gain a fresh start after a bankruptcy process,
In contrast, a liquidation process typically means that the business has exhausted all other options and can no longer continue its operations.
Liquidation is usually a last resort for a company that is insolvent and cannot meet its financial obligations.
Once the process is complete, the company is dissolved and ceases to exist as a legal entity.
Types of Liquidation
There are several types of liquidation, but the three most common types of liquidation are creditor’s voluntary liquidation, compulsory liquidation, and members’ voluntary liquidation.
1. Creditors’ voluntary Liquidation: This arises when a company’s directors realize that they won’t be able to pay their debts on time, or their liabilities exceed their asset value.
In such situations, the directors will appoint a liquidator to settle their company’s legal disputes or debts, after which the directors are obliged to cooperate with the liquidation process in order to pay back their debts.
The process of creditor’s voluntary liquidation starts when the company’s directors pass a resolution to voluntarily wind up the company over its inability to settle debts as they fall due.
They then appoint a liquidator who will take control of the company’s assets and sell them off to settle the outstanding debts.
Once appointed, the liquidator takes control of the company’s affairs, and the directors are required to cooperate with the liquidation process.
Creditor’s voluntary liquidation allows the company’s directors to close down the insolvent company and ensure that the company’s creditors do not suffer unnecessary financial losses.
2. Compulsory liquidation: This is usually initiated by the court as a result of a creditor or lender’s petition to liquidate a business if their debts are not paid within a short period.
When a creditor or lender initiates the process of compulsory liquidation, he must first file a winding-up petition with the court. If the court is satisfied that the petition is valid, it may issue a winding-up order, which allows for the liquidation of the business.
Once the winding-up order has been issued, a liquidator is appointed to take control of the business’s assets and sell them off to pay back the creditors.
The liquidator is usually an independent party who is appointed by the court to act in the interest of the creditors.
In compulsory liquidation, the liquidation process is usually more complex than in creditors’ voluntary liquidation because the business is forced to sell off its assets and liquidate the business to pay back its creditors.
3. Members’ voluntary liquidation: This arises when the owners of a solvent business decide to liquidate the business because they want to exit the business.
Members’ voluntary liquidation is different from compulsory liquidation, which is initiated by the court, and creditor’s voluntary liquidation, which is initiated by the directors because the business is insolvent.
It is often used when a business has run its course and serves no further purpose.
It is also used when a business owner wants to retire or move on to other ventures and does not want to continue operating the business.
The process of members’ voluntary liquidation is initiated by a resolution passed by the shareholders of the business to appoint a liquidator.
Once the liquidator has been appointed, he will take control of the business’s assets and sell them off to pay back the business’s creditors.
The liquidator will also ensure that any remaining assets are distributed among the shareholders in accordance with their rights and interests.
Factors that can lead to Liquidation
1. Insolvency: This is one of the common causes of liquidation.
Insolvency means a company is unable to pay its debts as they fall due.
If a company become insolvent such that it is unable to pay off its debts as they become due, then the company may be liquidated.
2. Legal disputes: If a company faces a lawsuit or a legal dispute that results in a judgment against the company, it can lead to significant financial liabilities such as settlement for claims for damages,
In some cases, a legal dispute may result in a court order to shut down the company.
This can occur if a creditor petition the court, or if the court determines that the company is no longer viable.
In such cases, the company will be liquidated, and its assets will be sold off to pay any outstanding debts.
