The term 'liquidation' often comes with negative connotations. Frequently the word is linked with bankruptcy, shady business dealings and a poor reputation. However, there is an incredible difference between voluntary and compulsory liquidation, which make confusion of the two, and their treatment as one and the same thing, quite inappropriate.
Compulsory liquidation involves a court (or other outside authority) ordering a company to liquidate its assets in order to pay creditors. In contrast, a company itself chooses to liquidate under a voluntary liquidation. A company opting to do this makes this choice in order to repay its outstanding debts and provide any remaining profits from sale to shareholders.
Why and when would a company voluntarily liquidate?
There are a great many reasons for why a business may undertake this process. These reasons may include, but not be limited to:
Faced with this reality, some companies understandably see this process as a better alternative than the declaration of bankruptcy. By opting for it, a deal with creditors can often be worked out so that the company will repay a percentage of its debt. In this way, a voluntary liquidation can be more time effective as it is commonly understood that declaring bankruptcy and negotiating and complying with court requirements can be lengthy and expensive.
How does it occur?
As a first step, a resolution needs to be passed stating that this voluntary liquidation has been agreed by company director(s) and shareholders. Following this resolution, it is quite common for a company to stop trading.
In the event of the company being profitable as the liquidation process begins (and for at least five weeks before the process began), a majority of the company's directors will make a statutory declaration of solvency. This is necessary to allow the voluntary liquidation to be processed as a Members Voluntary Liquidation with the business being wound up in a way that is appropriate for its circumstances.
However, the company may be insolvent as the process begins. And, although it is rare, it is also possible that a statutory declaration of solvency be made. In both of these cases, the voluntary liquidation will be approached as a creditor's voluntary wind up of a company.
Should a creditor's voluntary wind up be necessary, company creditors will be summoned to a meeting arranged and facilitated by an appointed liquidator. The purpose of this meeting is to discuss the business' future, how its assets will be sold and profits distributed. It may be that a consensus cannot be reached at this meeting and so a liquidation committee may form to oversee how the liquidation process should be carried out.
Liquidation comes in different forms and it is important for business owners, company directors and shareholders to understand the difference.
Compulsory liquidation involves a court (or other outside authority) ordering a company to liquidate its assets in order to pay creditors. In contrast, a company itself chooses to liquidate under a voluntary liquidation. A company opting to do this makes this choice in order to repay its outstanding debts and provide any remaining profits from sale to shareholders.
Why and when would a company voluntarily liquidate?
There are a great many reasons for why a business may undertake this process. These reasons may include, but not be limited to:
- Key members of the company moving on or passing away
- Shareholders of the company deciding that continuing operations is futile
- The possibility of more revenue coming from the sale of company assets than replacement of lost company members and/or shareholders
- To release funds for the use of the broader company. (In this circumstance, a larger 'umbrella' company may sell off the assets of one of its subordinate or member companies).
Faced with this reality, some companies understandably see this process as a better alternative than the declaration of bankruptcy. By opting for it, a deal with creditors can often be worked out so that the company will repay a percentage of its debt. In this way, a voluntary liquidation can be more time effective as it is commonly understood that declaring bankruptcy and negotiating and complying with court requirements can be lengthy and expensive.
How does it occur?
As a first step, a resolution needs to be passed stating that this voluntary liquidation has been agreed by company director(s) and shareholders. Following this resolution, it is quite common for a company to stop trading.
In the event of the company being profitable as the liquidation process begins (and for at least five weeks before the process began), a majority of the company's directors will make a statutory declaration of solvency. This is necessary to allow the voluntary liquidation to be processed as a Members Voluntary Liquidation with the business being wound up in a way that is appropriate for its circumstances.
However, the company may be insolvent as the process begins. And, although it is rare, it is also possible that a statutory declaration of solvency be made. In both of these cases, the voluntary liquidation will be approached as a creditor's voluntary wind up of a company.
Should a creditor's voluntary wind up be necessary, company creditors will be summoned to a meeting arranged and facilitated by an appointed liquidator. The purpose of this meeting is to discuss the business' future, how its assets will be sold and profits distributed. It may be that a consensus cannot be reached at this meeting and so a liquidation committee may form to oversee how the liquidation process should be carried out.
Liquidation comes in different forms and it is important for business owners, company directors and shareholders to understand the difference.
