Liquidation – The Last Resort
The pandemic hit many businesses hard leaving them with limited revenue and cash inflows, requiring them to make difficult decisions in order to stay afloat. While we are starting to see the first signs of recovery since the onset of the pandemic not everyone is in a position to bounce back and may have to consider liquidation due to insolvency. This is not a get out of jail free card, it is a huge decision to make that has major consequences so it is important to understand what it really means to go into liquidation and what the repercussions are.
Liquidation is a last resort insolvency procedure for companies that cannot be rescued. Under this procedure the company’s assets are sold off with the proceeds being used to pay creditors and any residual amount is disbursed among shareholders. There are two broad types of liquidation – compulsory and voluntary liquidation.
Compulsory liquidation is typically implemented through a court order when creditors, shareholders, or directors file an application to a court alleging that a company should be put under liquidation due to its inability to pay its debts. The application is taken under consideration by the court and an order to liquidate may be put forward if it is deemed necessary. Voluntary liquidations occurs when a company’s shareholders and/or directors agree to wind up the company in order to meet outstanding payments that it can no longer afford to pay.
The biggest consequence of liquidation is your company shutting down and ceasing to operate. Liquidation is not a temporary fix, it is a permanent solution which will affect many people. Employees under the company may lose their livelihoods and directors could suffer reputational damage depending on the conditions of the insolvency. Insolvency can also cause irreparable damage to business relationships making customers and creditors lose trust in both the business and the people behind it.
Besides the aftermath of liquidation, the actual process itself will also have its costs. Though a liquidator will be appointed to manage the process, you, your directors and staff will also need to be instrumental in the procedures as well. Liquidation will require all internal stakeholders to participate in the process by supporting the liquidator with any information that may be needed. This can be quite demanding on people’s schedules resulting in a lot of time being invested in the process.
Being insolvent is not always the end of the road, there are many alternatives that can first be explored before resorting to liquidation. It is key to first consult a trusted legal practitioner about the avenues you can look into as there may in fact be ways to revive your company instead of winding it up. As Mundi & Mudhara (a Baker Tilly network member) our priority is to provide the best possible guidance and help ensure that you exercise the options that are best for you both in the short and long term; so before throwing in the towel give us a call and allow us to keep your world of opportunities open.