Liquidation of a Company Definition Process and Benefits

Liquidation of a Company Definition Process and Benefits

Liquidation of a company definition process and benefits

We all know how business works and what all steps are needed to start. There are businesses wherein multiple parties are involved. 

The parties may also include different countries. There is a concept or term that we might have or might not have heard, which is liquidation. 

In general, what do you mean by the liquidation of a company? Liquidation is the procedure of selling a company's inventory at a very major discount. 

In the liquidation process, the company is brought to an end. When a company moves into liquidation, the entities associated with that company's business are ceased. 

Thereby, both liabilities and assets are nullified. Assets are given to other established businesses, and liabilities are settled and paid off. 

Let's know more about the liquidation procedure and process.

What is the Liquidation of a Company?

Liquidation of a company means the company now under debt sells all its assets and operations to a much better and more reliable company. 

In the event of the company liquidation, a company ends its business completely, and certainly, the strategies won't work to save them. 

There is not a single cause or factor that affects the liquidation of a company. There can be multiple factors which can thereby be different that promote or leads to the liquidation process. 

Majorly the reason or factor that involves liquidation is the inability to solve the company's problem, which is mostly related to finances and/or decreased production. 

Liquidation is not done like that. There is a proper procedure that one is supposed to follow to go forward with this liquidation process. 

The order for liquidation procedure is signed and sanctioned by Adjudication Authority (AA). In liquidation, the selling of assets takes one by one. 

Everything is not sold out directly. Things take place slowly and steadily. The process here excludes cash and bank balances. 

Initially, one needs to pay off all the debts, and most companies, due to this reason, sell out their things and hand over the operations to others. 

The liquidation process is tedious and can be of numerous types. This includes the following. The company can be liquidated in the following ways:

Voluntary liquidation

Voluntary Liquidation is a type of liquidation which happens when there is insolvency. 

In this liquidation, the company voluntary step out of business and sold all its assets and operations to some other company. 

They wish that the company they are giving away everything must be reliable and functional enough to carry out everything easily. 

Creditors’ voluntary liquidation

Creditors' voluntary liquidation happens when creditors in the company think and have this perception that no one would be able to solve things for them.

Also, there is an issue in the process of down payments for the creditor, which is why they leave the company. 

The name of the type can well understand this type of liquidation, 'creditors' voluntary liquidation'. 

The distribution of assets in liquidation is also a part of the process of liquidation. 

The asset distribution is not done in an unorganized way. It is not necessary that the complete distribution may be given to a single company. 

There may be multiple companies or shareholders involved when it comes to asset distribution. One may either distribute their assets to a single company, or else they can do it to multiple companies. 

Causes for liquidation of a company 

Nobody wishes to give away their business like that. There are factors that lead to such a major decision. 

There are causes for the liquidation of a company. Let’s get to know them better. 

1. Insolvable Trade

The major reason why a company moves into the process of liquidation is because of them going bankrupt and having a lot of debts. 

In such cases, it's beneficial for a company to voluntarily move into this process of liquidation in order to avoid any further inconvenience to themselves. 

As the term says, 'insolvable trade' means that the trade or the business they are into is not doing justice to the costs that are involved. 

One may think at an instance that moving into liquidation is not the right decision, but it has numerous disadvantages associated when does not goes for liquidation. 

Thereby, in the cases of insolvable trades, one can opt for the process of liquidation. 

2. Protection

It's crucial to protect your company from falling into any further debt. With the help of liquidation, you can protect your company and its employees.

Sometimes we get a little emotional, and in the cases of insolvable trade, we do not wish to move into liquidation. 

But we forget the fact that moving into liquidation will rather save and protect the company. 

It will also not let you fall deeper. Moreover, it can help you not take any further debt. 

Henceforth, to protect the company, one may go for the process of liquidation.

3. Freedom

 Also, to get freedom from the losses that the company is facing, one may get into the liquidation process. 

A company's loss is not only finance-related but can also be a mental and physical loss. 

Any loss one has to face can lead a company to deal with stress, anxiety and depression. 

We are so focused, related and attached to our work that we neglect our health. 

And when the losses phase comes over, it gets more difficult for us to survive and deal with it. 

Henceforth, to attain freedom from financial losses, stress, anxiety and depression, one may move forward with the process of liquidation. 

The Process of Liquidation

The liquidation process includes the following steps:

  • The directors and shareholders are furnished with documents. 
  • Shareholders and creditors to conduct the process of liquidation
  • The appointment of IP takes charge and completes the process. 
  • Insolvency professionals will collect the assets of the company.
  • Insolvency professionals will determine all payments to the company. 
  • Insolvency professionals distribute funds to the company  

Also, there is a settlement of the claim in the procedure of liquidation. There is a sequence of events under the liquidation process in claim settlement. 

This includes the following

1. Secured

In this, the company first settles its preferential creditors, which include employees and landlords. The company reimburses all the secured creditors and their loans. 

2. Unsecured

After clearing its dues with the creditors, the company must settle them with the suppliers, contractors, etc. 

3. Stakeholders

After all, this is done. Finally, the funds are distributed amongst the shareholders, investors and owners. 

There are a lot of famous companies who have followed the procedure of liquidation. These include Marka and Design Studio Group.

Benefits of Liquidation Procedure

Most of us have this perception that the liquidation process is not good. However, this process includes its benefits and advantages. The benefits associated with liquidation include the following.

  • Reduces the debt repayments 
  • Calls off the lease arrangements
  • Terminates the legal action
  • Sanctions and authorizes the staff to claim redundancy pay.
  • Leases seem to be cancelled
  • Low costs are involved 
  • Easier for the company to pay off their debts 
  • Helps them to deal with their losses in a mature way
  • The best way for a company is when they know they are bankrupt and have a lot of losses.  
  • Court processes are avoided
  • Outstanding debts are written off 
  • Employees can claim their unpaid salary. 
  • The business matter wherein the trade has become insolvable comes to an end. 
  • The business owners and directors are no more responsible now.
  • The stress and depression associated with the feelings of loss bring no more discomfort as everything gets settled and pays off. 
  • Individuals associated with the company can apply for other companies and live their life at their own pace. 

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In conclusion, liquidation is the procedure of selling a company’s inventory at a very major discount. 

In the liquidation process, the company is brought to an end. When a company moves into liquidation, the entities associated with that company's business are ceased. 

Thereby, both liabilities and assets are nullified. Assets are given to other established businesses, and liabilities are settled and paid off. 

There are a lot of causes that cause liquidation. But liquidation is not always voluntary. 

Liquidation can also be forced wherein the individual, without any will, has to give away their assets and shut off their business. 

The liquidation follows a sequence of events and a full-fledged proper process. The process can take time, and the amount of time it requires vary from person to person. 

No matter what, liquidation has its associated benefits and advantages that can help the company to deal with the losses in a much better and more mature way. Losses bring in a lot of discomfort, both financially and mentally. To deal with the losses, liquidation can help the company eliminate them.

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