Liquidation - What It Means and What's Involved

Liquidation is a formal legal process related to insolvent businesses. This is often the final stage in management of a business which has been unable to meet its debts. Not many people, however, really understand the liquidation process, or what's involved.
Liquidation- definitions
In general, liquidations are based on court processes. These are the basic types of liquidation:
1. Liquidation by creditors
If a business is unable to pay its debts, creditors may apply to the court for winding up of the business and appointment of a liquidator, often selected by the creditors. The liquidator manages the company and attempts to achieve maximum returns for creditors.
2. Voluntary liquidation
In some cases a business may voluntarily enter into liquidation or receivership, and apply to the court to appoint a liquidator to manage the business to ensure payment of the outstanding debts.
3. Company liquidation
Because a company is a separate legal entity, a company must be "wound up" by court order, and various statutory processes related to ownership of company assets are involved. In the case of companies, there are additional requirements imposed by corporate law, and may also be legal issues in relation to liabilities on company directors.
Liquidators- Their role and responsibilities
Liquidators take over companies subject to liquidation orders. They're responsible for the proper management of the business, and they're also liable for any mistakes or errors in terms of their role.
A liquidator must:

• Act strictly in accordance with the court order applying to the business.
• Properly manage all aspects of business during the course of liquidation.
• Act in the best interests of creditors.
• In the case of companies, lodge regular statutory reports regarding the affairs of the company.
• Submit reports to the court and creditors as required.
• Carry out investigations of financial affairs of the business and report to the court where applicable regarding any legal issues.

A liquidator may:

• Continue to carry out business in order to obtain best value for creditors
• Sell business assets to obtain money to settle debts owed by the business.
• Take management action to improve business returns and performance.

Liquidators as managers
The liquidator's role is very straightforward in theory, but can be extremely complex in practice.

• This is a fairly simple description of a liquidator's primary tasks when taking over a business as manager:
• Financial records must be put in order, ASAP. The sooner the records are functional, the sooner the liquidator can get to work. The liquidator is also under a legal obligation to ensure accuracy of financial information.
• The liquidator must obtain an accurate valuation of the assets and liabilities of the business. It's not at all uncommon for liquidators to discover other debts as well as debts owed to known creditors.
• Business expenditure, if any, must be managed on a needs basis, with the emphasis on reducing loss of money from day one.

Liquidators have another role- They're the best people to ask about managing any business debt issues. If you're a creditor or a business owner, a consultation may save you a lot of problems.