Liquidation in a Nutshell

The term ‘liquidation’ conjures up negative images for many people and is too often confused with bankruptcy – liquidation and bankruptcy are not one and the same. It also follows that not all types of liquidation are the same, with voluntary liquidation occurring for some companies while others are forced to compulsorily liquidate.

What is liquidation?

The term liquidation refers to the process of a company dissolving (or making liquid) its assets and liabilities. Sometimes this may apply to the whole company, while in other instances it will relate to part of the company.

Contrary to popular belief, not all companies are liquidated against their will. Sometimes businesses make the strategic decision to liquidate part of a business that is not performing in order to redirect funds to more lucrative parts of the business or other ventures.

Essentially, business liquidation is considered in terms of whether it is voluntary or compulsory.

Voluntary Liquidation:

Voluntary liquidation occurs when the directors of a business recognise that the business is failing to make profit and is untenable. However, in the event that the business has assets that are able to be sold and is sufficient to pay debts, the business is classified as solvent and the process is known as Members’ Voluntary Liquidation.

Creditors’ Voluntary Liquidation, also known as insolvency, is actually more common. This occurs when the business does not have assets that are substantial enough to pay its creditors.

A company voluntarily declaring itself insolvent will usually appoint a licensed insolvency practitioner and the company’s directors will work with them to arrange meetings with shareholders and creditors. These meetings are important as they help to develop and pass the decision to appoint the insolvency practitioner as the liquidator. A meeting with the business’ creditors will then take place to inform them of why the business has reached the insolvent position and, if desired, give them the opportunity to suggest an alternative liquidator.

Following this meeting, the appointed liquidator takes control of the business and its assets.

Compulsory Liquidation:

Compulsory liquidation is quite different to voluntary liquidation and occurs as a result of a court order. Compulsory liquidation is a process by which a creditor or company director issues a petition through the court to have the company wound up and effectively, cease to exist. If a business has more than one director, a joint petition must be put forward by all directors, if it so happens that a company director puts the court order forward.

If a creditor is to seek a court order to have the business wound up, this will usually follow the failure of the business to pay after a statutory demand for payment has been issued. Businesses have twenty one days to respond to such a demand and if payment is not received, the creditor can take up the court order.

Compulsory liquidation by a creditor means that the creditor is liable for all costs incurred as a result of his or her actions. However, when liquidation takes place, the creditor initiating this action is the first considered for payment.

This article provides a brief overview of liquidation – voluntary liquidation and compulsory liquidation. Small businesses should ensure that the options for liquidation are understood and those who find themselves in the position of needing to or being forced to liquidate should certainly consult a professional for advice and guidance particular to their situation.