What is Liquidation of Company?
Liquidation is the winding up of a business or company, the sale of assets to distribute them depending on whether the company is solvent or insolvent. Liquidation of company typically happens when a limited company has reached a point where, for one reason or another, it has been concluded that the company will not continue. In this instance, you might consider liquidating your company; which means utilising your assets into cash.
Turning assets into cash is normally done to pay off a kind of debt, depending on investments made into the company by creditors, or loans carried out in developing the business, for example.
Liquidating leads to dissolving the business or company, and making all activity to a close. It is a plan for a business that has run out of funds (is insolvent) to include any remaining debts.
Why a Company Would Liquidate?
The main purpose a business would prefer to liquidate its assets is due to insolvency. Insolvency typically means that a company reaches a point where it is not ready to make necessary payments when they are due. Choosing liquidation changes the company assets to cash, which is then applied to make these payments.
You may be required to consider liquidation because your business is no longer solvent. If the company remains solvent it can, however, be managed by the directors of the company but when it is insolvent, you can put the company in control of a liquidator who will then trade with the features of the liquidation or winding up of a company.
If the company is deemed insolvent any residual assets will be sold to pay off any outstanding creditors. Any value remaining after all required payments have been made is then classified amongst any shareholders.
What are The Three kinds of Liquidation?
While liquidation might seem straightforward, there are three different conditions under which a company can be sent into liquidation. For each of the types of liquidation described below, there is a particular process that must be followed:
- Members’ Voluntary Liquidation
In some instances, the business proprietor might prefer to discontinue the business for a variety of reasons. In this case, a member’s voluntary liquidation implies that the company is in fact still ready to make its payments on time, but it is the choice of the company owner or associates to wind-up.
- Creditors’ Voluntary Liquidation
This happens when the manager of a company realises that the company is not able to pay off its debts and can start the method of liquidation after attending a vote with the shareholders. If the majority of shareholders (75% or more) vote to liquidate, then the method can start.
- Compulsory Liquidation
In this condition, the company is completely not able to make payments to its debts and the director connects directly to the court to request that the liquidation method is implemented.
The Role of the Liquidator
The liquidator is made to handle the liquidation method. Their main duties are to take stock of the company’s assets and return if supplies are available, a percentage to the creditors.
An essential part of the liquidator’s purpose would be to examine all business affairs should they need to obtain any of the company’s assets that have been removed or sold at less than the market price from the company as the liquidator is at right to modify these activities.
Insolvency and Bankruptcy Code (IBC)
The first step in a corporate insolvency analysis method is to get every possible attempt to replace the business entity and restart it. It is commonly performed by making a ‘resolution plan’ and implementing it.
But if that doesn’t work out, then the method that results in liquidation. The exciting thing to recognise is that in no way does the IBC Preamble apply to liquidation, which is just used as a last resort if either there is no resolution scheme or the resolution methods proposed are not up to the point.
The liquidation order can be established by the Adjudicating Authority (AA) in the following situations:
- When a resolution method is not taken before the specified period
- When the Committee of Creditors (CoC) allowed liquidating the corporate debtor
- When the Adjudicating Authority (NCLT) refuses the resolution, the plan submitted
- When the corporate debtor opposes an approved resolution system
How Long Does It Take to Liquidate a Company?
If your company is insolvent and is to be liquidated it is beneficial to understand how long the method takes so that you can get on with your life. When you’re in that position, you need to identify how liquidation works, so you can take the required steps for both you and your business. It is necessary to understand that the more active that you can get all the paperwork in order, the faster the method takes. As a director, you have to support the liquidator.