If you want to know how exactly a liquidation works, it basically means that a company is going to be closed. Read this guide to know further on what’s the entire procedure of doing it legally.
Liquidation is a procedure in which a company is closed. Additionally, the assets and properties of the company get transferred to the owners and creditors. You can describe liquidation as winding up or dissolution, but technically, dissolution refers to the final liquidation stage.
The liquidation process can be either compulsory or voluntary. The term “liquidation” means that the company looking to do it has completed the preparation to dispose of the majority of its assets. For example, a retailer chain may want to shut down certain stores.
What Happens When a Business Goes Into Liquidation?
When a company enters liquidation, it will cease to trade, employees will be free, and the business itself ceases to exist as an entity that everybody recognizes legally.
As a director, your authority will be revoked, and you’ll not have access to business bank accounts.For solvent businesses, liquidation can be an effective tax-efficient option for companies with assets to sell with no outstanding debts.Insolvent (in debt), an accredited insolvency practitioner can arrange the liquidation of assets of your company. Also, the company’s creditors will receive the proceeds.The company will no longer stay on the list by Companies House. The company won’t exist now.
Convert Assets to Cash
Regarding business strategies, it’s essential to understand when and when to transform assets into cash. While liquidating assets is one of the most important aspects of bankruptcy proceedings, companies also use liquidation to make money, even without financial difficulties.The main reasons for companies to liquidate are to rid themselves of idle or surplus assets, acquire additional working capital, or repay the debts of creditors.Auction sales and liquidation sales are among the most frequently used methods to get rid of assets. The liquidation process is the method of selling assets. It’s a systematic method to achieve greater values close to the fair market value over a long period.
What is the Liquidator?
A liquidator is an individual who is designated to take over the business affairs of a firm in case of a company’s closure, typically when the business is about to go into bankruptcy. The company’s assets are transferred to the liquidator, and the proceeds are used to settle the company’s obligations.
He is legally authorised to perform various functions for the company. In case of liquidation purposes, the liquidator has the power to trade the company’s assets on the market for cash in the open or the other assets that have the same value.
Method for Liquidation of a Company
The process of liquidating an organization begins with the sale of every single asset. Based on priority and need, as per the agreement, the decision is firm and does not include money and balances in the bank.The remainder is divided among the suppliers after paying off the debts. But, the repayment is made in a predetermined order. The secured creditors get the priority of the company, and the balance comes into use to pay preferential creditors, including the government tax, salaries of employees, etc.
Following the settlement of these obligations, the balance will help in paying the holders of debentures and other liabilities of a different kind that the floating charges secure across all properties. The next step is to pay the unsecured creditors and shareholders.
The last step is determining whether the funds are in surplus following every single payment to the creditors mentioned above. If they’re surplus, the money is then divided among shareholders. If they are in deficit, shareholders are required to pay the portion of capital that is not paid.
Different Types of Liquidation
1. Liquidation in Voluntary Form
Suppose the owners, directors or shareholders of a business were notified that the business could not pay its debts due in such circumstances. In that case, the liquidator assumes control of the company and controls the liquidation process. The liquidation process takes place in a variety of cases.
2. There Are Three Types of Liquidation
Compulsory liquidation In this scenario, creditors apply to the Court to liquidate the business since they believe the company is insolvent and incapable of settling its obligations. One of the most significant creditors to file a petition with to the Court is HMRC when taxes are due and the government considers the company insolvent beyond repair.
3. Creditors’ Voluntary Liquidation
This kind of liquidation happens when the shareholders or directors of an organization come to know that it’s going to default on creditor payment. Also, there won’t be any involvement of the Court.
4. Priority of Claims
Who comes first that you must pay in the liquidation process? Well, the rules and regulations determine it through the “priority of the claims.’
There is more information on who you paid, when you paid him/her, and how you addressed the employees.
The order, in brief, is like this:
- Unsecured creditor
- Costs incurred by the insolvent estate
- Secured creditor (often banks will take the collateral and offer it for sale)
- Creditors with preferential rights (which includes employees and is now HMRC)
- The practitioners of insolvency
Benefits and Drawbacks of Liquidation of a Company
Benefits of Liquidation
- It is when you have an insolvent company which was struggling to keep up with legal issues in a regulated method
- The lifting of the county court judgments or debt collection pressure
- Keeping a record of your annual tax or accounts returns is unnecessary
- Eliminates the responsibility of directors and owners
Disadvantages of Liquidation of the Company
- Shareholders must pay back illegal dividends
- The speedier administration will provide advantages to the creditors
- Business reputation loss, trading licenses, and other valuable assets
- The business doesn’t have permission to use the same company name in the future
From the above points, you understood the liquidation procedure, the circumstances, scenarios and the complexity of the process. The article explained the difficulties in the liquidation process one might face while closing down a company’s activities.
When the liquidation process is successful, the organization will cease to be a part of the market by the law. Many businesses and creditors have the simple question: how long will it take to dissolve and liquidate the business? There isn’t an easy answer.
However, it is obvious that the more complicated the business is, the more time the disposal of the assets we expect to take. After everything has been liquidated, the business will be dissolved.
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- Difference Between Company Winding Up and Dissolution of Company in India