“Liquidation” and “winding up” are terms used increasingly as companies struggle with the economic realities of trying to do business in unsettled markets. When a company is wound up, it can have a devastating effect on staff, associated companies -- such as suppliers -- and the local community. The national economy is also affected, especially where larger companies cease trading.
According to a firm of corporate insolvency practitioners, liquidation occurs when a company is soon to cease operations and involves a range of legal actions to wind-up the business. Liquidation and insolvency proceedings vary slightly between England and Wales, Scotland and Northern Ireland. Companies House, which stores information collected via the Companies Act, recommends that businesses facing liquidation seek professional advice from an insolvency practitioner or solicitor.
Liquidation and winding up
Effectively, liquidation and winding up are inter-changeable terms referring to the same process. A company’s assets -- which may include property, equipment, vehicles, materials, petty cash and other things -- are listed as a prelude to their being sold or otherwise redistributed to offset debts and other obligations to creditors. Liquidation and administration, on the other hand, are two different things.
Different types of liquidation
Compulsory liquidation occurs when a court orders that a company is to be wound up, according to Companies House. An official receiver or other qualified legal practitioner is appointed to oversee proceedings. Voluntary liquidation is brought about when a company’s owners and managers take a frank look at the financial state of the company and decide to enter into liquidation proceedings themselves. In this case, proceedings are carried out by a qualified practitioner.
Administration refers to the appointment of an administrator, when a company is in financial crisis and at the point of insolvency. The administrator has powers to make decisions on behalf of the company and may decide that liquidation is the best course of action. However, this step is not obligatory and an administrator may take other steps to move the company from the brink of financial crisis back to solvency and continued business operations.