Different Types of Liquidation

What are the different types of liquidation?

 

The law classifies liquidations into two types:

 

  1. Voluntary Liquidation (which is by a Members of Directors Special Resolution)

  2. Compulsory (by a court order). If a Creditor bring a Liquidation Application against a Debtor.

Liquidations are also classified according to whether the company is solvent or insolvent.

 

Solvent and Insolvent Liquidations

 

If the company is insolvent, this means it is unable to pay its debts as they fall due. In this situation there is potential conflict between creditors (those to whom money is owed), as there will be insufficient assets for all creditors to be paid in full.

 

The law attempts to maintain an equality between creditors, so the assets are distributed proportionately according to the size of each creditor's claim. However, the law gives priority to secured creditors (those with a charge over some of the company's property as security for the debt). In addition, a number of rules exist to prevent one or more creditors from gaining an unfair advantage.

 

Voluntary liquidation (by shareholders' resolution)

 

Voluntary liquidation refers to the process whereby the shareholders appoint a liquidator, who is then answerable to the creditors or shareholders.

 

It is not necessary to make any application to the court for this; however, the liquidator may apply to the court for directions and the court has power to remove a liquidator.

 

A voluntary liquidation may also by commenced by the board of directors if an event specified in the company's constitution has occurred.

 

Voluntary liquidation may be in one of two forms, depending on whether or not the company is solvent. If the company is solvent the shareholders can supervise the liquidation. However, if the company is insolvent, the creditors may take control of the liquidation process by applying to the court. The court will require proof of solvency or insolvency to determine this matter.

 

Compulsory liquidation (by court order)

Compulsory liquidation of a company requires obtaining a court order. This process starts with an application to the court alleging that one or more of the required grounds exist. The application may be brought by the company or a majority of its directors, or by the Registrar of Companies, or by a creditor. Applications by creditors are by far the most important and common.

 

Applications may be brought on a number of grounds, the most important being that the company is unable to pay its debts. There are a number of factors that the court will take into account when deciding whether or not to make a compulsory liquidation order. The court has a discretion as to whether or not to make the order.

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