Question

Discuss as to whether it will be plausible for unsustainable companies to go for voluntary liquidation or compulsory liquidation. Explain with using relevant examples.

Answer 1

While a company is placed into voluntary liquidation by its directors, in the case of compulsory liquidation, it is a creditor which forces a company into this situation. If a creditor is owed $750 or more by the debtor company, they may be eligible to petition the court for its winding-up.

If the courts then grant a winding-up order, a liquidator is appointed and business assets are liquidated in order to realise returns for outstanding creditors.

When a company goes into liquidation its assets are sold to repay creditors, the business closes down, and its name is removed from the register at Companies House. There are two main types of liquidation process, solvent and insolvent liquidation.

Solvent liquidation usually involves a director’s retirement, or may be the closure process chosen when a business serves no further useful purpose. This is called a Members’ Voluntary Liquidation (MVL).

Insolvent liquidation occurs when a company cannot carry on for financial reasons. The overall aim of an insolvent liquidation process is to provide a dividend for all classes of creditor, but it is often the case that unsecured creditors receive little, if any, return.