Liquidation is the process by which the receiver or an insolvency practitioner formally takes control of a business in order to realize and distribute its assets to its creditors to satisfy debts owed. Following this realization and distribution, the company will be dissolved.
A company can go into liquidation in different ways:
- Compulsory liquidation – this is a legal route where an affected party (usually a company’s creditors or the company itself) asks the court to order the company to be liquidated.
- Voluntary Liquidation of Members – this is an out-of-court way where the shareholders of a solvent company decide to put the company into liquidation and pay the company’s debts in full to its creditors.
- Voluntary Creditors Liquidation – this is an out-of-court way where the shareholders of a company decide to put the company into liquidation and the directors cannot confirm the solvency of the company. Some of the company’s creditors may be able to appoint administrators before the company is placed in creditors’ voluntary liquidation, but if this does not happen, creditors still have the right to choose which liquidator to appoint and to be regularly informed of the liquidation process.
The type of liquidation appropriate for a business, and whether liquidation is appropriate for a business, will depend on the particular circumstances of the situation. Various factors will have to be taken into account, including the cost of the relevant insolvency proceedings and the general solvency of the company.