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Liquidation - Definition & Advantages of Liquidation | What is Liquidation?

Liquidation represents the methodical termination of a business and the distribution of its assets to shareholders and creditors. It can also encompass the conversion of a stake in securities into cash. 

The process is typically triggered when a business, overwhelmed by debt, is unable to continue its operations. The primary objectives include discontinuing business activities, liquidating assets to satisfy liabilities, and fulfilling any outstanding obligations. 

In general, the inability of a company to generate adequate profits necessitates liquidation. The reasons prompting liquidation can differ, with insolvency being the most prevalent. 

Understanding Company Liquidation 

In the event of a company declaring bankruptcy, a liquidator is appointed to dispose of its assets to settle debts. Any residual funds are subsequently distributed to the shareholders. 

There are certain prerequisites that must be satisfied prior to commencing the liquidation process, which is subject to approval by the relevant adjudicating authority. The resolution professional involved in the corporate insolvency process may assume the role of the liquidator. 

Procedure for Liquidating a Company 

The commencement of liquidation involves the sale of all assets. Decisions regarding the disposition of assets are made based on priorities and necessities, excluding cash and bank balances. Once liabilities are settled, the remaining funds are apportioned among the shareholders. 

Methods of Liquidation 

Depending on specific circumstances, three different methods of liquidation could be employed: 

Voluntary liquidation: Initiated by the company's proprietors, not as a result of insolvency. This suggests that the company is capable of settling its debts. 

Creditors' voluntary liquidation: This form of liquidation is instigated by the company's directors or shareholders when they discern that the company is no longer solvent. 

Compulsory liquidation: This is decreed by a court or adjudicating authority when the company defaults on its debts, leading to its dissolution. 

Advantages of Business Liquidation 

  • Facilitates the orderly wind-down of an insolvent business.
  • Enables a business under duress from creditors to cease operations, with an insolvency practitioner managing all creditors.
  • Relieves directors and business owners from their responsibilities.
  • Eliminates the requirement to submit annual accounts, VAT accounts, or tax reports.
  • Permits employees to claim for unpaid wages, holidays, notice money, and redundancy benefits from a government fund, subject to certain restrictions.
  • Allows directors to establish a new business or seek alternative employment.
  • While guarantees to creditors remain in effect, the responsibility to manage creditors can be eliminated.
  • County court judgments and debt recovery demands are dismissed, excluding directors' personal debts.
  • Directors are no longer pursued by HM Revenue & Customs for PAYE or VAT.