Company liquidation can be of different types. It could be voluntary or could be involuntary or forceful liquidation. It happens when a company is unable to pay off its debts to the creditors. Then the assets of the company are converted into cash and paid off to the creditors who were paying for the company’s upkeep till then. The creditors could either be lending agencies or the bank itself from where the company had taken a loan once. It is the absolute last resort the lenders opt for when the company fails to pay off the debts after the specified period. As part of company liquidation, the assets of the company whether it be the raw materials, resources, or machinery all are auctioned off or sold directly to the creditors. The cash thus obtained is distributed among the lenders. Here is everything you should know about the process of company liquidation.
Benefits of Company Liquidation
There are several perks associated with liquidating a company. Starting from alleviating the pressure from the creditors to finally ward off all financial liabilities are the most important ones. When the company is not able to generate enough benefit needed to sustain itself in the market, it is always advisable to liquidate the company rather than to face far worse legal consequences.
No more debts
Once the company is liquidated, the money is distributed among the creditors. So there will not be any tension regarding debts after that. The issue of money will be sorted releasing the company owner from more complications
Avoid legal actions
When a company is immersed in debts, it can gradually lead to legal complexities. The people at the apex can be affected and can get stuck in the turmoil of legal actions. Through liquidation, the company can save its managing directors and board from facing penalties and legal actions.
Alleviate pressure from the creditors
Being in debt can amount to huge stress and concern. With constant pressure and intimidation by the creditors, things will become hard for the directors and management. By liquidating the company all this can be alleviated. Once the money is paid, there won’t be any more conflict with the creditors.
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Disadvantages of Liquidating a Company
Company liquidation is like two sides of the same coin. Even though it can alleviate the creditors’ pressure and intimidations, it can also cause other problems for the owners of the company. Before deciding on company liquidation one must weigh the pros and cons and choose the one that is the best. One should consider the legal consequences, financial consequences, how it will affect the employees in the company as well as other management members and directors and of course should calculate the personal consequences and losses it can cause. Below are the few major disadvantages behind company liquidation.
The company will cease to exist
Once liquidated the company will cease to exist. The owner(s) should be ready to face this and should be mentally and emotionally ready. The company will no longer be there and the ones who worked behind it would need to start again from scratch.
Might need to settle more payments
Even though company liquidation can pay away all the financial liabilities ultimately freeing the owners from further pressure, you might still need to settle some payments in certain cases.
Loss of valuable assets
This is another major setback of company liquidation. It can result in the loss of valuable assets. It could be the raw materials, pieces of machinery and anything and everything that was associated with the company. It can incur a severe loss to the owners as they must have spent a fortune over it.
Long duration
Company liquidation can take up to 6-12 months. It means the owners will have to go through the pressure of the procedure for prolonged periods. Also, it negatively affects the employees of the company as well. They will not be able to claim redundancy until the procedure is completed.
Understand the Different Types of Company Liquidation
Compulsory Liquidation
In this, the company is forcefully liquidated because it is not able to pay off its debts to the creditors. The board of directors are forced to liquidate the company and pay off the debts. In this, the lender approaches the court with solid proof showcasing how the company has failed to pay off its debts and requesting for liquidation of the same. The lenders prove in the court that the financial means of the company has exhausted and it is not capable of paying off the debt. The court looks into the financial structure of the company and takes proper action.
Voluntary Liquidation
In this unlike in forceful liquidation, the directors themselves arrive at the decision to liquidate the company and sell its assets to pay off the debts. It is more of a rational approach. When the company is no longer able to generate profit or be of any benefit to the people associated with it, the directors decide to liquidate the company.
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Company liquidation happens quite often in a city like Dubai. When the company is not able to generate enough benefit or reap any profit, it is liquidated. As far as the big companies are concerned, the legal actions are against the company and not against any individual members. The central governing bodies are responsible and answerable to the legal calls and not any individual member.
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