Liquidation of a company - Definition , Process and Types ?

 

In case the enterprise is bankrupt, the liquidator simply sells off the company’s assets to repay liabilities once the liabilities are paid off, the positive balance is then distributed among the company’s shareholders.

To start the process of liquidation of a company, it needs to qualify for certain conditions and only then gets approved by the Adjudicating authority. Therefore, the liquidation order is sanctioned by the Adjudicating Authority (AA) in the following cases

Process of liquidation

The process of liquidation of a company starts with the selling off of all assets one by one. Based on the priority, and necessity as per the understanding, the decisions are made, this excludes the cash and bank balances.

The remaining amount is then distributed among the distributors after repaying the liabilities. However, this repayment is processed in a pre-established order. The priority is given to the company’s secured creditors and the remaining amount is then used to discharge preferential creditors, this includes government taxes, employee salaries, etc.

Types of Liquidation

Liquidation process is a tedious one, and requires crucial steps to process. But based on the conditioning and multiple other factors, the following are the three types of liquidation that you must know about:

  • Voluntary liquidation: A liquidation that is not forced by the insolvency and this type of liquidation is solely decided voluntarily by the owner(s) or member(s) of the company. This clearly indicates that the company can be considered solvent and is in a position to make payments for the creditors.

  • Creditors’ voluntary liquidation: This type of liquidation is processed when the directors/shareholders of the company realize that it is going to default on creditor payments, and no involvement court is there in this case.
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