Sorting Out Your Accounts

All About Liquidation: Understanding The Different Types Of Liquidation

by Lydia Washington

Not every business is a success story despite all efforts. And one of the best ways to close your company is through liquidation. It entails selling your remaining assets and redistributing any revenue realised from the sale amongst creditors and shareholders based on priority. However, liquidation can be complex. In addition, it's usually a formal procedure regulated by relevant authorities. For this reason, knowing a thing or two about the process is always helpful if you are considering liquidating your company.

Understanding the different types of liquidation is an excellent place to start. This piece delves into the specifics.

Voluntary Liquidation

As the name implies, this is a voluntary form of liquidation. It comes in two primary types: creditors' voluntary liquidation and members' voluntary liquidation, also known as solvent liquidation. Generally, company directors will know when the company is in financial distress and beyond saving. For instance, your liabilities may have exceeded your company's asset value, you may be unable to pay your debts in time, your company's cash flow may be on the low, or you could be losing critical contracts or customers. When this happens, the directors may choose to initiate a creditors' voluntary liquidation.

Usually, the process entails directors or shareholders appointing insolvency practitioners to take charge of the liquidation. However, since this type of liquidation is typically voluntary, directors will often initiate the liquidation as a last resort. In addition, legal requirements exist regarding the liquidation of an insolvent company. Take the creditors' interests, for instance. Directors and shareholders may be required to prioritise the creditors' interests. For example, they may be required to avoid incurring additional costs and debts. In some cases, in line with protecting the creditors' interests, directors may need to cover any costs like insolvency practitioner fees to avoid accruing extra debts.

Members' voluntary liquidation is the other type of voluntary liquidation. Unlike creditor's voluntary liquidation done for insolvent companies, members' voluntary liquidation happens for solvent companies whose owners would like to exit. They may decide to liquidate it voluntarily, but a specific percentage of the company's members must agree to the liquidation. Liquidators are then appointed, and revenues realised from the liquidation distributed amongst the members and shareholders. This liquidation usually comes with tax benefits since funds realised from the liquidation aren't subject to income tax but capital gains tax.

Compulsory Liquidation

In contrast with voluntary liquidation, compulsory liquidation is usually initiated following court orders rather than by directors. In many cases, this happens because of non-payment of debts. A creditor can then initiate compulsory liquidation. In addition, if directors and shareholders have irreconcilable conflicts, the court may decide to wind up the company through compulsory liquidation. For more information, contact a company like Menzies Advisory.