Closing A Company's Books
Liquidation explained: When a business is unable to continue its operations or decides to move on to better pursuits, it has to perform a couple of things first to properly seal off the legal fact of its existence, putting an end to annual fees for bookkeeping and demands from suppliers and creditors. One of the processses a company needs to complete before its members can move on is liquidation.
Apart from liquidation, though, companies that are swamped by unsustainable expenses or debt burdens do have a number of alternative solutions available to them. First, they can attempt recapitalisation from a third party investor, who then takes over the ownership of the company. Liquidation in this case often serves to incorporate a former business entity into a previously existing, now enlarged business.
Secondly, there are companies that are able to consolidate their debts and go under voluntary administration, which is done under a court's order, enabling them to continue in business. In other cases, companies find business liquidation their best option.
Liquidating a company begins at the time its board of directors slows down business activities, which eventually leads to the distribution of company-held assets and holdings. This act of liquidation can be enforced by creditors demanding payment or be the voluntary act of a company's shareholders. This means that shareholders can choose to hold a meeting and vote to dissolve their company, without looking at business performance, if they have no more need for the company as a legal entity. Still, a profitable company with no liabilities has the advantage of liquidating itself without having to use a court-appointed liquidator.
A liquidator appointed by the company takes the main role in the liquidation process, overseeing a review of the company's financial records, recovering assets, and fulfilling obligations to creditors and suppliers by order of priority. Liquidators perform these duties subject to the approval of the company's board and shareholders and the court.
Before assets are distributed, a company liquidation will undertake an assessment of its property under legal guidelines. This assessment will determine to whom a specific good or asset will belong to. For example, goods that are consigned by a supplier are generally considered to be the supplier's possession and are to be returned. Any property that the company controls on behalf of a benefactory third party is likewise not payable to creditors.
Creditors' claims upon a liquidated company's assets have varying strengths, depending on their contracts' terms at the time the loan was made. Secured creditors take the first place in line in getting compensation from the company's assets sale, which they would get by taking over a property that was offered as guarantee or bond for the loan.
Preferential creditors are also amongst the first in line during a company liquidation, as the nature of their demands are deemed to be more urgent and integral to a company's existence. Employees of a liquidating company, for instance, are considered preferential creditors, giving them rights to claim compensation for unpaid days and separation benefits.
Contractual claims upon a liquidating company can be enforced in some cases prior to its final dissolution. Someone with a binding agreement with the company to purchase one of its buildings, for instance, can appeal for a court order through the liquidator to complete the sale and have the title of the property transferred to him, once the company has been paid for the sale.
After priority demands upon a company have been paid, the costs of liquidation (legal fees, transaction taxes) are next to be paid, followed by preferential creditors and then unsecured creditors. Any assets left after this process will be for sharing between the company's ex-members according to their proportion of shares within the company, although what happens often is that most assets are exhausted whilst in the middle of paying creditors' claims or even at a point before that.