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When a Business Should Liquidate

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Company liquidation is an insolvency procedure that results in a business being shut down. It’s typically initiated by outstanding creditors through a petition or court order.

A court order notifies a business that a petition was lodged in order to bring closure to activities of the business, as well as the liquidation of assets.

When to opt for liquidation

Most are aware of the fact that over 50% of businesses close or fail within the first few years of operations. Company liquidation is the best option when any of these situations occur:

  • There are inadequate resources to cover business costs – to be viable, businesses may require additional capital. However, there are those that can’t secure costs to continue operating. Borrowing money in the hopes of covering it with future revenue that hasn’t been secured also calls for company liquidation.
  • Excessive expenditure while building the business – when a business can no longer survive as it is simply burning money with research and development, then liquidation may be a good option.
  • Bad financial management – good businesses may still be sabotaged by poor financial management by company administration.
  • Lack of knowledge on crucial business practices – basic business practices, although seemingly inconsequential, are important. For instance, entering into an agreement without being fully aware of obligations that come with it may lead to insolvency. When this happens, it is best to resolve the situation using company liquidation.

There are actually two kinds of company liquidations: voluntary liquidation and compulsory liquidation. Both result in companies being closed; however, there are several benefits to companies that opt for voluntary instead of being court-ordered to undergo liquidation.

Voluntary liquidation is done with the formal insolvency process and the directors of the insolvent company will be able to retain control over the liquidation process. They’re able to choose their own insolvency or liquidation expert to handle the company’s shutdown.

They’re also more in control as to the timing of the closure. As for compulsory liquidation, the entire process is dictated by local courts. It is taken out of a business’s hands completely.

The additional benefit with the voluntary liquidation process is it reflects better to the company’s directors compared to compulsory liquidation wherein it is forced upon.

A voluntary liquidation demonstrates directors’ or company owners’ awareness of financial problems that the company is facing. The directors seem like they take action immediately in stopping the situation from escalating, and worsening the creditors’ position further.

With the compulsory liquidation, it indicates the directors or company owners were unaware of the financial distress. They may also be have been aware but chose trading even when they’re sinking.

The company liquidation follows the assessment of conduct of directors. If there is evidence that insolvency of a business was ignored, the positions of creditors will be worsened and legal action will be taken against directors personally.

Duration of company liquidation

Compulsory liquidation can move at an extremely fast face. Voluntary liquidation, on the other hand, takes a lengthier time. It prolongs the situation for directors and employees at the same time.

Employees and staff members, with voluntary liquidation, will be able to receive redundancies that they may be entitled unlike with compulsory liquidation wherein it’s not uncommon for staff members to wait even for a year just to receive redundancy.

Who can initiate liquidation of a company

Unlike voluntary liquidation which is initiated by the shareholders and directors of the company, compulsory liquidation is typically started by frustrated creditors or by the court. A creditor that is owed a significant amount by the business is able to petition the company to undergo winding up.

It is advised that if your business is unable to settle payments to creditors, you should seek legal counsel or the opinion of a company liquidator.

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Why creditors would order for companies to liquidate

Compulsory liquidation is an extreme measure that a creditor may take against businesses when it can’t settle payments. Deciding to liquidate a business is often not done out of frustration. Instead, it is a last attempt in getting debts paid.

If creditors were after debt settlements for a long time already, then they may have the impression that compulsory liquidation for the business may give them an opportunity to get money that was owed to them after assets of the business are sold.

Take note: It will only be possible when there are enough funds or assets of the business to be distributed to creditors. Click here for more details.

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jon snatham

Thanks for a great tips, This would be a different idea from the routine tips. We specialise in finance, tax, IT, marketing & HR Services . As an ISO 9001 certified company with over 30 years international experience in accounting, VAT and technology, we have the unique capabilities to ensure you are fully compliant to the UAE legislation. See our range of articles, white papers and learning resources and self-study material to learn accounting, VAT and taxation at your own pace