What does the liquidation of a company mean?

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What does the liquidation of a company mean?

Liquidation of a company is a process of bringing the company to an end or more precisely bringing business and thus a company to end or shutting it down completely and distributing the assets to the claimants.

The situation is usually called upon by the director’s choice or if there is some undue force by the creditors to cease the trade made by the company. Whenever a company goes into liquidation, the assets of the company are sold, generally to the investors or creditors. The staff is laid off, and the company itself will cease to exist as a legal entity. So, basically, a company liquidates when it is unable to pay off its creditors and have to sell its assets in order to pay them. But it could also be a voluntary act as well, where the law ensures that any debts of the company in existence are cleared before it shuts down.

 

Understanding liquidation

Certain companies tend to shut down the trade or business because they are unable to meet the current requirements to do business, and hence, they wind up all the legal operations of the company. Now the company has certain investors and shareholders, who add up their capital to the company in the form of investment and buying some percentage of the shares of the company and it is necessary for the company to pay off the amount that belongs to the creditors or shareholders. So, the amount gained by selling the assets of the company is shared by the creditors and shareholders.

Common steps involved in the liquidation of a company-

Turning the assets into cash

To pay off the investors and other liabilities assets are generally converted into cash. This is nothing but the process of liquidating the company’s assets.

Role of a liquidator

A liquidator is an individual that is responsible for taking out the process of liquidation of a company. The director of the company has the freedom to appoint the liquidator. The liquidator takes scare that all of the company’s internal and external debts are paid by converting the current assets and other relevant property of the company into cash.

Process of liquidation

Now the main procedure and aim of the liquidation process are encountered. Apart from cash and a bank balance that belongs to the director or the company owner, other assets and properties of the company are sold by the liquidator. For the repayment process to the creditors, a pre-established order is followed. Secured creditors of the company are considered to be given the first preference and are thus paid first. After that, preferential creditors are considered and are paid their respective amounts. At last other bills of the company like internet bills, electricity bills and other taxes that are due to the government and the salaries of the employees are paid off.

After dealing with all above practices and errands, debenture holders and remaining liabilities secured against floating charges on assets and unsecured creditors and shareholders are paid off. Lastly, if there is any surplus of funds left after paying off all the above-mentioned creditors, then those funds are distributed among the shareholders.

 

There are two main types of the liquidation process

 

  • Solvent liquidation
  • Insolvent liquidation

 

 

Solvent Liquidation

Solvent liquidation, also known as Members Voluntary liquidation. In this kind of liquidation, the assets and cash of the business are extracted in a full tax manner so that it can be divided properly among directors and shareholders. Now a common question arises that what is a solvent company? A solvent company is a company whose debts exceed its assets. If a company has assets exceeding its liabilities or even if it is financially stable, even then too directors may want to liquidate the company for some reasons.

Some of the reasons for this kind of liquidation are: –

  • Directors may realize that the company has much property and relevant assets on its name, but they are in no terms useful for the company in future to maintain business.
  • If the shareholders or directors want to back off or retire and thus want to transfer the cash and assets to them on a personal basis.
  • The directors or shareholders may want to invest or start in a new company and thus want to take out cash beforehand from the old one.

Insolvent Liquidation

When the debt of a company exceeds its assets, and when the company is unable to meet its liabilities, the company goes through the Insolvent liquidation. Common reasons for a company to go through insolvent liquidation are-

  • Cash flow crisis caused due to limited funds.
  • Excessive debts and lack of stable sales.
  • Loss of important customers and poor retention of important employees.
  • Loss of business because of new competition.

So, these were two main types of liquidation processes. General circumstances under which a company liquidates is when no resolution plan is submitted by the interim resolution professional as received from the adjudicating authority before the expiry of the insolvency resolution period.

 

Steps for company liquidation in Dubai

  • The company should first submit a notice to the DDA (Dubai Development Authority), one month prior to the liquidation stating the reason for the closure of the entity.
  • The de-registration process involves a board resolution attested in front of free zone executive. In the special case if the owner of the company is outside the home country or if the owner of the company is some another foreign country then the resolution must be notarized from the Dubai embassy of that country.
  • Companies must return all keys.
  • A copy of the advertisement for the new paper in both English and Arabic must be provided by the company.
  • The original license, certificate of formation, original department of Economic Development, the lease agreement must be provided by the company. 

There are certain documents required for the liquidation procedure-

  • License Copy. 
  • Memorandum of association copy with all the changes.
  • Power of attorney (if any).
  • Shareholder’s resolution.
  • Shareholder’s passport and Emirates ID.
  • De-resignation application form.

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