Audit and Assurance

Types of Liquidation for Shareholders and Creditors

December 6, 2019 Comments Off on Types of Liquidation for Shareholders and Creditors

Liquidation can be referred to as the process of the financial and economic operation of distributing assets to the clients, and the final goal will be how to bring an end to a business. Liquidation meaning is the scenario when there will be a due of obligations that shows the insolvency of the company. At the end of the operation, the company has to pay its assets to the shareholders, and creditors based on their claims. A bankrupt business will not exist after the completion of the liquidation process.

There are various types of liquidation that involve member’s voluntary liquidation, creditor’s voluntary liquidation, and the third one includes the compulsory liquidation.

Voluntary Liquidation

The creditors’ voluntary liquidations are the scenario when happens when the shareholders of a company deciding for winding-up a company that they hold shares in,  but the company is downgraded so they can’t pay back the amount to all the creditors. This is called being insolvent, or being in debt that represents not having enough capital in the business. The liquidation will go into force the moment the decision to liquidate has been made and should be carried out by a qualified Insolvency Practitioner.

Members’ Voluntary Liquidation

Members’ voluntary liquidation, is somehow the same as the voluntary liquidation but with the significant difference is that the shareholders want to close the business down regardless the company does have enough money to pay all its debts. This type of company is classed as a solvent, meaning they have enough cash to close without owning money.

The hearing for the winding-up order will be held in court, and the liquidation carried out by a qualified insolvency practitioner. The directors will have to show that the company can pay all debts, with interest in certain cases, within a twelve-month time frame.

The decision to petition the court can be done if some of the directors vote against liquidation provided the vote to liquidate was a majority decision. The decision will be filed at Companies House, and the directors will have to prove that they have carried out in-depth research and audit of the company’s position financially.

Compulsory Liquidation

A court has the legal right to make winding-up of a company into Liquidation when petitioned by some shareholders or creditors connected with the business. The role of Creditor is who wants to pay for the company regarded as the direct owner of the organization. If there is more than one director, they will all need to file a combined petition in the court for a winding-up their company as a single director can not do it. If a creditor placed the petition, it is generally because, in spite of a statutory demand, the debt has not been paid, or undisputed or ignored within the legal timeframe of twenty-one days.

With compulsory Liquidation of the company via the Creditor, there is no cost to the company from the Creditor’s actions although their prices will be at the top of the list for payment during the Liquidation. The winding-up hearing will take place in court where the order will be made. It can be an embarrassing experience for the company directors to be questioned in public. The reputation of the company can be hampered by this liquidation procedures.

How Badly a Liquidation Process can Hamper a Business

Liquidation can degrade the reputation of the company that may lead to the loss of trust from the investors or the citizens who want to invest in the company.

  • If the company is in debt the company will have to stop its trading
  • All the legal power of the director or owner will be ceased.
  • The company will be shown as in debt because it doesn’t have enough capital to pay its shareholders or creditors.
  • Apart from the voluntary liquidation, the other two liquidations will lead to the degradation of the credit rating.

The Ultimate Goal of The Liquidators to Avoid Bad Reputation

There are certain steps that a liquidator can follow to escape from the bad remark

  • The company can carry out a proper investigation that should involve both the internal audit and external audit of the company.
  • By protecting the creditor’s interest.
  • By maintaining an organized accounting and bookkeeping service of the company. That should record all the transactions and analyze the cash inflow and outflow.
  • Protecting and seizing the assets in the end.
  • Recover the money paid to the creditors within six months of liquidation.
  • Recover all the assets and loans as soon as possible
  • Deregistration of the company officially

Closure

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