3 Types of Liquidation and What’s Best for Your Situation

04 Dec 2019
3 Types of Liquidation and What’s Best for Your Situation

There are many reasons why a company may need to liquidate its assets. In fact, business asset liquidation is relatively common.

For those unaware, when a business is liquidated—regardless of whether it is insolvent or solvent—a formal process transpires whereby the corporate entity stops all transactions. The business assets are sold to the highest bidder, and the capital that is generated from the asset sales is used to pay off any outstanding debts that the business may have.

Assuming all debts have been paid off, any leftover money is distributed to all applicable shareholders of the company before they go their separate ways. It should also be noted that while the liquidation process is usually similar in most scenarios, there are three primary forms of liquidation that you should be aware of.

Determining which liquidation type is best will depend on the status of the business right before the liquidation was initiated, as well as which party initiated the liquidation process. Here, we will discuss the three types of liquidation in greater detail, as well as which liquidation type is best for you.

The Creditors Voluntary Liquidation Process

In the majority of cases, an insolvent company, which is also unprofitable, and is unable to pay off its outstanding debts to its creditors, will usually opt to close its doors voluntarily and enter the creditors’ voluntary liquidation process.

To do so, the shareholders of the business must all be on board. They must unanimously issue a resolution to wind up the enterprise and also hire a liquidator who will be responsible for mediating the process.

In regards to the creditors, most, if not all, will likely be paid less than the amount that is owed to them. They must be provided with the option to veto or approve the liquidator who is chosen by the business. If the creditors fail to respond to the invitation to authorize the appointed liquidator, it is generally presumed that they have provided their consent or acceptance by default.

Next, the appointed liquidator will go over the affairs of the business as well as the actions and conduct of the directors involved. The creditors’ voluntary liquidation process is finalized once the company’s assets have been released, and all revenue generated from the sale is distributed to the creditors — and in some instances, shareholders — in accordance with the statute.

The Compulsory Liquidation Process

If you are part of an insolvent company, then compulsory liquidation may be another option for you. In most cases, compulsory liquidation occurs when a company’s actions come under official scrutiny, which may be due to corporate malfeasance, collusion, or other such illegal activities.

However, some companies may be forced to liquidate because they have failed to pay their debts for an extended period that is considered unreasonable by the company’s creditors.

For instance, some of the creditors may apply to the court to try and wind up the business involved because they feel that they will never recoup their investment without legal action. In addition, while rare, certain Crown Authorities may also opt to prosecute if the enterprise under investigation has conducted business in a manner that is improper, unethical, or underhanded in some capacity.

If the court has decided that winding up the business is an appropriate course of action, then the Official Receiver will usually assume the role of liquidator to try and resolve the issue. In some cases, a liquidator will be appointed via an external party, if a sufficient number of creditors are supportive or hiring an eternal liquidator.

The Official Receiver may determine that it would be more appropriate to appoint an external liquidator due to the particular or unusual circumstances involved in the case.

The Members Voluntary Liquidation Process

In some cases, a solvent enterprise may opt for the voluntary closure of said enterprise. This is referred to as a members’ voluntary liquidation and is more common than many people realize. De facto, there are a plethora of reasons as to why a solvent business may choose to close up shop despite being able to pay back all its creditors without much effort.

It is very similar to the process that is involved in a creditors’ voluntary liquidation; however, the process is more straightforward, because the company will be able to meet all of its financial obligations without issue. The process is streamlined, as no creditors will need to be consulted, as they will be satisfied once they are repaid in full.

Once the debts of the business have been paid off, there may be a way to avoid the liquidation process altogether. However, to do so, any assets that are remaining after having paid off all creditors must amount to a predetermined figure or less, which will differ from country to country.

In the UK, if the surplus amount generated is found to be below 25,000, then the liquidation process will not be necessary. In such a case, the surplus funds can be distributed to the company’s shareholders before the company is struck off for good, which will invariably reduce the final costs and increase the remaining capital that can be distributed. If the surplus amount were to exceed $25,000, then the members’ voluntary liquidation process will need to transpire.

To learn about the different types of liquidation, call Michael’s Global Trading at 888-471-5066 or contact us here.

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