The manner by which a company is brought to an end or close is called liquidation. The appointed liquidator has the responsibility of liquidating the business’ assets and the realization out of that is redistributed to creditors in the order of priority. The last step of liquidation of a company is referred to as dissolution where it will be struck off the registrar. The decision to close can be done in various ways, either voluntary and compulsory.
The voluntary type of liquidation, which is decided upon by the directors and shareholders of the company themselves, can be done in two different ways: creditor’s voluntary liquidation by insolvent companies and member’s voluntary liquidation by solvent companies. The first type of liquidation is initiated by a resolution issued by the shareholders which result in the dissolution of an insolvent company. It also involves the redistribution of the assets of the company to the creditors. Usually, this option is considered as a safe exit of the directors from a stressful situation and can be the best option for them to move on without having to worry about the company’s debts hanging over their heads.
Member’s voluntary liquidation of the company is being initiated by the members of the company and is usually used as part of the business exit plan and to address taxation concerns. This is decided upon the company being headed towards its natural end or the directors prefer to extract the value of assets and cash from the business. However, in order for this liquidation to materialize, the directors need to provide a declaration indicating that the company has no remaining obligations to creditors.
On the other hand, compulsory liquidation of the company comes from the creditors through a court order. It is perhaps the most stressful since it comes from the creditor who wants to close the company forcefully through a court order. This procedure is instigated with a winding-up order and is typically managed by the liquidator or insolvency practitioner. It has been used as a last resort by unhappy creditors over overdue payments by the company.
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