Liquidation is the procedure to wind up a company and finalize all its affairs. A company reaches this state only when it suffers acute financial difficulty. It may plan to close down their business, sell off their assets as well as pay off the creditor debt as soon as possible. In this article, we will learn about the impact of company liquidation on shareholders.
How shareholders do are impacted by liquidation?
Before liquidation, the director of the company is responsible to make decisions in the best interest of the firm, its shareholders, and its creditors. Once the company is declared insolvent then a liquidator is appointed. In this case, the director’s duty is only responsible to the creditors.
If you are a shareholder of a company, then you carry high risk when the company gets insolvent. In the majority of cases, shareholders do not receive any money in the process of liquidation. Only when they claim as a creditor, they have some chance of getting money from the company.
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Types of company liquidation
Company liquidation is categorized into two types:
Creditors Voluntary Liquidation
This kind of liquidation starts in the following ways:
- When creditors choose “liquidation” after either a voluntary administration or after an ended action of company arrangement
- When the shareholders of the insolvent company aim to settle the firm and hire a liquidator.
In this type of liquidation, the company seeks the assistance of the court to appoint a liquidator to wind it up. Shareholders have a low priority than creditors. There is no assurance of getting any dividend at the time of the process of liquidation. The amount that a shareholder receives depends on how much money remains with the firm once all creditors are paid.
Impact of Liquidation On A Company And Its Shareholders
Liquidator gets all the rights
Though the director loses its power, he is still required to assist the liquidator to realize, collect as well as liquefy any assets of the company to distribute the sale proceeds to verified creditors. As per Section 477 of the Corporations Act, a liquidator gets the power to perform the following tasks.
- Collect as well as safeguard assets of a firm,
- Trade the company business;
- Sell the company assets;
- Examine the financial transactions and affairs of the company,
- Undertake legal claims or recoveries
Shareholders still have the right to examine the records, and books kept by the liquidator on request.
Finalizing all company’s operations
The liquidation process gets completed in just four to six months. This implies that after this period, the company will stop trading, the debts get finalized and the business gets formally closed.
A shareholder can provide a personal guarantee if they don’t then they may be personally accountable to pay off the company’s debts when it gets liquidated.
Insolvency results in damaging consequences that include voluntary administration, corporate insolvencies, and creditors’ voluntary liquidation. Shareholders carry risks that can be lowered or mitigated when the right steps are taken by them at the right time.