Liquidation is a legal process through which a company or a business is brought to an end. When a business is liquidated, its assets are sold off and the proceeds are used to pay its creditors. It is also known as winding up or dissolution of business.
Liquidation is an alternative for businesses which are unable to pay their debts. The creditors take control of the assets of the company, and sell them off to get the maximum amount back that they can. They get first priority to whatever is sold off. Next in line are the shareholders who get whatever is left, with the preferred shareholders, having preference over common shareholders.
Liquidation can be of two kinds; it can either be compulsory or voluntary. Compulsory liquidation occurs when the court orders a business to liquidate its assets and pay off its creditors. A petition can be put forward in court by the company itself, the creditors, or the contributors. Usually, the reasons behind this are that the company is unable to pay its debts, or it is equitable to wind up the company. Voluntary liquidation is supported by the shareholders of the company, who decide to wind up the company and dissolve it.
There are some steps to be followed in the liquidation process. First, a detailed inventory is taken of all the assets of the company, and it is categorized according to different types. In case of inventory, auctions can be held, in which items can be sold to the highest bidders. Liquid assets are easy to sell as compared to non-liquid ones. For example, plant and machinery can prove to be difficult to sell at reasonable prices, and often, losses are incurred on them. Real estate can be sold through foreclosure auctions or with the help of an agent.
An Insolvency Practitioner is hired for this entire process who deals with the creditors and the legal requirements of liquidation. Liquidation is not free; the costs of winding up your business can be considerable. For a small business, it costs around 7,000 pounds which are payable to the Insolvency Practitioner.
There are some alternatives to liquidation which should be considered before making this drastic choice. Sometimes, companies prefer to be simply struck off the Register as this is a cheaper option. In this case, a request is made to the registrar to strike the name of the company off the register. The company can be added to the register again when it is in a good financial position. Phoenix is an option for businesses in the UK which can allow them to have a fresh start. This process includes liquidating a company and then resuming it under a different name. This allows the company to retain its customers and suppliers.
Liquidation is a final step for any business, thus, it should be taken carefully. If you wish to continue your business in spite of your financial problems, it may be a better option to go for one of the alternatives mentioned above. However, if there is no other way to clear your debts, or you believe that the business is no longer viable, liquidation is the most suitable option.