If you are a director or shareholder of a company facing insolvency, you may wonder what your options are. The most drastic insolvency proceedings available to distressed companies are liquidation proceedings, also known as winding up. Nevertheless, in practice, liquidation is reserved for companies with little chance of being rescued. This article will explain the liquidation process and what you can expect if your business faces insolvency. <\/p>\n\n\n\n
Like administrations<\/a>, voluntary arrangements, and court-sanctioned restructuring plans, liquidation is a form of formal insolvency proceedings. However, liquidation is the most drastic of all proceedings because they are the equivalent of a death sentence for a company. <\/p>\n\n\n\n In a liquidation, a court appoints an insolvency professional known as a liquidator. The liquidator then takes control of the company from the directors and proceeds to sell off the company\u2019s assets on a piecemeal basis to recover as much money as possible. Finally, the liquidator uses the proceeds of these sales to pay back the company\u2019s creditors in the legal order of priority (see below). <\/p>\n\n\n\n In insolvency, because the insolvent company usually needs more assets to meet its liabilities, there is rarely enough money to pay back all its creditors in full. As a result, its creditors often receive partial repayment, and the shareholders receive nothing.<\/p>\n<\/div>\n\n\n\n If you are a director or a shareholder, this may sound unfair. However, insolvency law exists to maximise creditors’ rights over shareholders when a company has insufficient assets. <\/p>\n\n\n\n Liquidation comes in two forms, including:<\/p>\n\n\n\n Voluntary liquidations come in two forms, including:<\/p>\n\n\n\n Since members\u2019 voluntary liquidation is only available for solvent companies, we will only examine creditors’ voluntary liquidations (CVL). In a CVL, the insolvent company\u2019s shareholders (i.e., its members) formally initiate the proceedings by approving a special resolution<\/a> requiring at least 75% of the shareholders\u2019 approval to wind the company up.<\/p>\n\n\n\n In practice, the directors typically propose the resolution. Likewise, the shareholders must also appoint a liquidator. When the resolution is approved, the directors usually have a week to notify the company\u2019s creditors. The creditors have a right to overrule the liquidator’s appointment and substitute their preference. <\/p>\n\n\n\n The liquidator then takes control of the company when the creditors either:<\/p>\n\n\n\n At this point, the directors cease to manage the company. However, the liquidator may obligate the directors to provide information and support the winding-up process.<\/p>\n<\/div>\n\n\n\n Compulsory liquidation refers to liquidation proceedings commenced by certain parties, which apply to the court for a winding-up petition. The law permits several different parties to apply for a winding-up petition. This includes the company itself (via its shareholders) and insolvency practitioners already managing its affairs. However, in practice, unsecured creditors are the most common applicant. <\/p>\n\n\n\n When the applicant lodges the petition, the court will convene a hearing if there are sufficient grounds to do so. Usually, the applicant must prove that the company cannot pay its debts, which the court typically assesses on four separate grounds. <\/p>\n\n\n\n If the applicant successfully obtains the court\u2019s approval, it must notify the company. At this point, one or more creditors may appoint a liquidator of their choosing, provided they obtain the necessary consent from other creditors. Absent any creditor appointment, the law automatically appoints the Official Receiver, a court officer, as the liquidator unless the court intervenes and appoints a liquidator.<\/p>\n\n\n\n Regardless of the liquidator\u2019s identity, the liquidator controls the company\u2019s affairs at this point. The liquidator can order the directors to assist it in the liquidation process. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nForms of Liquidation Proceedings<\/h2>\n\n\n\n
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Voluntary Liquidation<\/h3>\n\n\n\n
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Compulsory Liquidation<\/h3>\n\n\n\n