November 22, 2009
How Does Liquidation Works In Business?
A process in law, which enables the businesses to end their existence, and their activities, is termed as liquidation. All the assets of the business are disposed off to convert it into cash, so it can be used to pay off its dues to its creditors. The process is sometimes, also called dissolution of the company, or winding up of the company.
Liquation is an alternative for businesses, which are unable to pay their debts. The creditors take control of the assets of the company, and sell them off to get the maximum amount back that they can. They get first priority to whatever is sold off. Next in line are the shareholders who get whatever is left, with the preferred shareholders, having preference over common shareholders.
Liquidation can be of two kinds; it can be either compulsory or voluntary. Compulsory liquidation occurs when the court orders a business to liquidate its assets and pay off its creditors. The company itself, the creditors, or the contributories can put a petition forward in court. Usually, the reasons behind this are that the company is unable to pay its debts, or it is equitable to wind up the company. The shareholders of the company, who decide to wind up the company, and dissolve it, support voluntary liquidation.
Liquidation does not happen right away, it goes through several stages. The first of these stages is the detailed accounting of the inventory of all the assets of the company; the whole inventory is divided into different categories, and is carefully listed down. To liquidate the inventory, it is put up for auction, and the highest bidder takes the possession. It is quite easy to convert liquid assets into cash than the non-liquid ones. One such example is of the plant and machinery, as it depreciates over the time, or the model gets outdated, it becomes difficult to even its cost price, mostly they are disposed off at a loss. An agent can be hired to dispose off the real estate, or foreclosure can be done for selling it.
An Insolvency Practitioner is hired for this entire process, who deals with the creditors, and the legal requirements of liquidation. Liquidation is not free; the costs of winding up your business can be considerable. For a small business, it costs around 7,000 pounds, which are payable to the Insolvency Practitioner.
It is always advisable to look for the alternative methods before deciding to go for liquidation. In many of the cases, it so happens that the companies prefer to de-register themselves, instead of going through the whole process of liquidation. For de-registration, a request is forwarded to the registrar, to de-register your company.
Once your financial position recovers, you can again register yourself. An option for the businesses in UK is Phoenix, which enable them to start their business again. Phoenix work in a way that it liquidates the company first and after that it enables the businesses to start again with a new name. The benefit of this process is that it allows you to retain your customers, and suppliers. As there is nothing that can be done after the company is liquidated, therefore it is necessary to take this decision after careful consideration. If you have any plans of continuing the business once your financial position recovers, and you are back on the track, then you should better go for de registration. However, if you do not see any way of improvement and the business is only incurring losses, then it is better to liquidate the business concern.
Bobby Dazzler is a legal consultant. You can take his advice on company liquidation and protect yourself from your creditors. For more information visit his recommended website at http://www.beesley.co.uk.
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