Question

Discuss the issue of the liquidation of companies (partnership). What advantages and disadvantages do you see in forming or liquidating a company? Based on these advantages and disadvantages, you would recommend another form of property, why or why not?

Answer 1

Liquidation is the process of winding up a business due to it's inability to pay it's debt. In this process, the business is closed and it's assets are distributed among the claimants, based on the priority of their claims.

The advantages of liquidating a partnership are:

Debts are written off: On the business being liquidated, all the outstanding debts are written off. It releives the partners from a stressful situation, specially when there is no way that the business can be back on its feet.

Certain contracts can be cancelled: Terms on lease and hire purchase agreements are generally terminated at the date of liquidation. Thus, no further payments need to be made in respect of such contracts. If any money is due, the company leasing the goods can claim from the insolvency practitioners their claim just like other creditors.

Legal action is stopped: Any legal action against the business is stopped on liquidation. Thus, its becomes a great relieve when the business is facing many legal issues.

The disadvantages of liquidating a partnership are:

Personal Liability: Partnership business, being characterised by unlimited liabiliy, the partners are personally liable for any short fall in the money due to creditors. Thus, the partners are in a position to lose their personal assets in the case of liquidation.

All business assets are sold: There will be no assets left with which to start a new business. All existing assets will be sold off to pay the creditors.

All staff will be laid-off: Valued staff will be laid off. Thus, the will look for other employment. Thus, any new business will need to be built from scratch with lack of inherent knowledge and expertise.

Based on this disadvantages, a partnership form of business have, I would recommend a company or Limited Liability Partnership type of organisation. These types of organisations are characterised by the feature of limited liability, thus, on liquidation the shareholder's or partners are not personally liable for the debts of the business. They donot have to pay from their personal asset for any shortfall in the money payable to creditors.