Liquidation is when you dissolve all of your assets and shutdown the company, or you sell it off. In order for this to occur, shareholders or the court is responsible for hiring a liquidator, who will then take the interest of every creditor into account and administer the whole process of converting the resources into money. If the company can afford a lawyer, then it should hire an experienced commercial lawyer.
The work involves releasing the company from any legal responsibilities, and allocating the surplus funds among the shareholders according to the company’s policies.
There are three types of liquidation you can opt for:
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- Member Voluntary
In this type of liquidation, a company is closed by its directors or shareholders in spite of having a huge amount of assets. The company is not bankrupt in this type of liquidation; therefore creditors are rewarded with full payment and the rest of the money is divided between the directors or shareholders.
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- Creditors Voluntary
You can opt for this category if you are bankrupt and cannot pay the debts. Here, the company is liquidated in order to pay those debts. According to the creditor’s claim, equal distribution of assets occurs between creditors after the payment of debt, but secured creditors are given more importance by the law. Other laws are also in place to avoid unfair distribution.
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- Court Liquidation
In this kind of liquidation, the directors and creditors request the court to appoint a liquidator for the company and it takes place in the occurrence of a bankruptcy. A court order is compulsory for court liquidation, and the application submitted by the creditor will include the debt that the company is facing.
Liquidation Process
The following steps are taken while liquidating a company:
- When the company decides which type of liquidation they would like to opt for, the shareholders hires a liquidator or ask the court to hire one for them.
- The liquidator then analyses the company’s assets which comprise of unpaid shares and uncalled capital and disburse them among the creditors, depending on their claim and priority.
- The leftover finances are divided among the shareholders and the company officially shuts down.
Cost of Liquidation
Following are the results of liquidation that a company has to face:
- The power to divide the assets is taken away from the company.
- Business will be continued by the company only until a particular time or purpose, after the process of liquidation takes place.
- After the selection of a liquidator, control of the company is taken away from the directors.
- When liquidation is announced, all the employees are discharged depending on the type of their contract. The employees will be asked to leave, even if the contract requirement includes a notice period. The company will then pay them compensation for the sudden loss of employment based on the time duration of your notice period.
- The decision to let the company proceed with the liquidation will be taken by the court. After the liquidator is hired, no legal action can be taken against the company without the permission of the liquidator.
Asset Distribution
The court distributes the resources according to hierarchy in the process of liquidation. Initial precedence is given to secured creditors and the rest of the debt is paid in the following order:
- All the fee and money that was utilized in the process of liquidation.
- The pay and earnings of all the employees which also include holiday compensation.
- Unsecured creditors
- Interest of the debts which were due before the liquidation.
- Shareholder debts
By following all the legal processes and with proper implementation of the laws, you can rest assured that liquidation will work not just in favour of your employees, but yours too.
