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

Closing a business and dispersing its assets to claimants is the process of liquidation. Asset sales are employed to pay shareholders and creditors in that order of importance. Another meaning of liquidation is getting rid of a stake in securities, typically by selling it for cash.

This liquidation process starts when a firm with excessive debt can no longer function. The goal is to close down business activities, sell the company's assets to pay off all liabilities, and, if any other commitments exist, fulfil them.

Determining that the company is no longer able to produce profits determines whether liquidation is confirmed.

The reason for a company's liquidation may vary, although insolvency is typical to be blamed. 

What is company liquidation?

If the firm declares bankruptcy, the liquidator liquidates its assets to pay off its debts. The remaining funds are distributed among the company's shareholders after settling debts.

A firm must meet several requirements before the liquidation procedure begins, and the adjudicating body must then approve.

The resolution expert designated for the specific corporate insolvency process can act as a liquidator if the adjudicating authority allows the liquidation order to proceed.

Process of Liquidating a Company

The first step in a company's liquidation is selling each asset separately. Then, the decisions are taken, excluding the cash and bank balances, on the understood priorities and requirements.

Following the payment of the liabilities, the residual funds are divided among the distributors.

Liquidation Methods

The arduous process of liquidation necessitates specific actions. However, the following are the three forms of liquidation that you need to be aware of based on the conditions and numerous other factors:

Voluntary liquidation: This liquidation is solely decided voluntarily by the company's owner(s) or member(s) and is not compelled by insolvency. This demonstrates unequivocally that the business can be regarded as solvent and pay its creditors.

Creditors' voluntary liquidation: This sort of liquidation is carried out without the involvement of a court when the company's directors or shareholders become aware that it will stop making payments to its creditors.

Compulsory liquidation: This is a formal declaration from a court of law or other adjudicating authority that the business is to cease operations and close down due to its failure to pay its debts.

The Benefits Of Business Liquidation

  • In a formal and organised manner, it stops the situation of a struggling insolvent firm.

  • When creditors pressure a business, that business may be shut down, and the designated insolvency practitioner, such as ourselves, will deal with all creditors.

  • The directors and corporate owners are absolved of accountability.

  • Once the liquidation is complete, you are no longer required to submit annual accounts, VAT accounts, or tax reports.

  • The government fund would allow workers to file claims for underpaid wages, holidays, notice money, and redundancy benefits. But there are some restrictions on this.

  • The directors may establish a new business or seek other employment.

  • Although creditors who have received personal guarantees will be unaffected, the directors' obligation to manage creditors may be abolished.

  • All county court judgments and debt recovery demands will be dropped, excluding the directors' debts.

  • HM Revenue & Customs will no longer pursue the directors for PAYE or VAT.