Types of Liquidation
Liquidation is the process by which a company (or part of it) is closed down due to bankruptcy or any other reason and the assets of the company are thereby redistributed accordingly. Depending on your country of domicile, other terms may be used to describe liquation, such as dissolution, or winding-up. There are two main forms of liquidation, these are voluntary liquidation and compulsory liquidation.
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Liquidation explained
During liquidation the assets of the organization are redistributed amongst the shareholders and the entire structure of the company is taken apart by a company liquidator. Additionally, there is a thorough investigation to determine the cause of liquidation, which is carried out by the liquidator.
The two main types of liquidation are the following;
- Voluntary Liquidation: this is the most common form of liquidation. The company’s management team, comprised of shareholders, directors and members, make the final decision to dissolve the company as the business is unable to operate successfully. This is referred to as the business being insolvent, that is, there is not enough money in the company to carry on functioning.
- Compulsory Liquidation: this is a form of liquidation by which a company is forced to shut down by order of the jurisdiction’s court. The court usually interferes with the business’s operations only when petitioned by someone who is connected to the company in some way, for example, a company director or a creditor who has not been paid.
These are the made reasons a company may face liquidation. There are various procedures that a company will have to follow in order to complete the liquidation process as it needs to be done in compliance with the jurisdictions regulations.
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