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How Does Liquidation Works In Business?
Liquidation is a legal process through which, a company or a business is brought to an end. When a business is liquated, 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.
The option of liquidation is for the businesses that cannot pay off their debts. The creditors are given the possession of the assets of the company who then dispose these assets off in order to recover their maximum dues. During the process of liquidation, the creditors are on top of the priority list. Once the creditors are paid, the preferred shareholders are the next ones to get paid, common shareholders are then paid after the preferred shareholders.
There are broadly two types of liquidation, compulsory liquidation, and voluntary liquidation. The liquidation would be termed as compulsory when the company is ordered by the court to pay off its debts by selling off its assets. The creditors, the company, or even the contributors whose due amounts are not paid by the company can file the request for such form of liquidation… The compulsory liquidation is termed as such, and it takes when the company cannot clear its debts by any other means, or when it is no longer profitable to keep the business running. Whereas, in the voluntary liquidation, it is the shareholders of the company who decides to wrap up the businesses of the company, and end its existence.
The following steps are followed during the process of liquidation. Initially, a detailed inventory of all the assets of the company is prepared, splitting it into different categories. After that, an auction takes place for this inventory in which the decision is given in the favour of the highest bidder. Non-liquid assets are difficult to dispose off as compared to the liquid assets. Take an example of plant and machinery, which depreciates over the time, and hence is sold at a much lower price than it was bought on. For disposing off the real estate, the services of a real estate agent are taken, or it can be disposed off through a foreclosure.
For the purpose of liquidation, a liquidator, who is an expert in the matters of liquidation, is appointed; he is the one responsible for looking after all the legal requirements, and dealing with the creditors. All such assistances do not come free, and might end up costing you a lot. A rough estimate of the cost payable to the liquidator for wrapping up a small business is around 7,000.
Liquidation is a great decision to make, so before jumping to this decision take into account all other methods available for bailing you out of the situation. Some of the businesses decide to go for de registering them instead of liquidating their business. For this purpose, all you need to do is ask the registrar to remove your name from the register of companies.
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.
Bobby Dazzler is a legal consultant. You can take his advice on company liquidation and protect yourself from your creditors. For more information visit his recommended website at http://www.beesley.co.uk.
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