What is Liquidation?

Liquidation is a process by which a company’s business terminates completely. All the assets of the firm are sold to pay the creditors and rest is paid to the shareholders. There are three types of liquidation processes. The type of liquidation process is decided on the basis of solvency or insolvency of the company. The solvency of a company can be checked by taking up balance sheet and cash flow test. Balance sheet test checks whether the assets of the company are more than amount owed by the company to the creditors. The cash flow test checks whether the company is in a condition to pay off the creditors at the time of due debts. The company is insolvent if these conditions are not satisfied.

Member Voluntary liquidation is used in case of closing of a solvent company. In this kind of liquidation, closure of the company is decided by its shareholders. A legal declaration has to be made by the company’s director to pay off the debts by selling the company’s assets within a year. The outstanding creditors are paid and company is closed. The remaining assets and money becomes the shareholder’s property then. There can be a lot of reasons for closing down a solvent businesslike personal choice of the owner, asset transfer to the other company of the same group.

In case of insolvent company, there are two types of liquidation processes-Creditors Voluntary Liquidation and Compulsory Liquidation. Creditors’ Voluntary liquidation is usually initiated by director or shareholder of the company. Insolvency practitioner is appointed to hold a meeting for the creditors to inform them about the company’s insolvency and call for a liquidator. The liquidator helps in selling the company’s assets and distributes them to the creditors of the company. It is the liquidator’s responsibility to cancel the due leases and close down the company.

Compulsory Liquidation or winding up is initiated by the aggrieved creditor who has not been paid. A solicitor is appointed by such a creditor who files a case in the court for winding up the company. After hearing also if the dues are not cleared by the company then a final order of winding up the firm is given by the high court. The official receiver sells all the assets to pay the creditor. If the company which is liquated is insolvent one then the liquidator will review the role of the company’s director. If the review is bad then the director the company can be accused for wrong trading.