What Happens When a Company Undergoes Mandatory Liquidation? | Push Digits Chartered Accountants

What Happens When a Company Undergoes Mandatory Liquidation?

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Mandatory Company Liquidation

Having to undergo compulsory liquidation can be arduous and stressful for a company’s shareholders. This is because compulsory liquidation is enforced on a company by the court at the request of the party/parties that the company owes money. Before we get into the details of compulsory liquidation, let’s develop a basic understanding of liquidation itself.

What is Liquidation?

The term “liquidation” is quite self-explanatory; it involves liquefying (converting into cash) a company’s assets so that its debts can be paid off. It’s a rather extreme way of paying off your debts. A company liquidation only takes place when it reaches a point of insolvency where it can no longer pay its liabilities in a normal manner. Simply put, liquidation is an option reserved for when a company’s financial mechanism fails completely.

It goes without saying that a company being liquidated is also dissolved. This means that the company is effectively shut-down.

Mandatory Liquidation

The liquidation process is started either by the company itself or by its creditors. Compulsory liquidation takes place when disgruntled creditors initiate the process. When a company becomes insolvent and its creditors are no longer willing to wait for it to pay them back, they request the court to step in. In rare cases, a company’s shareholder or director may also request the court to take action.

When the court steps in, the first thing it does is appoint a liquidator who shall monitor the entire liquidation process. The liquidator takes control of the company’s functioning. After this, all of the assets owned by a company are thoroughly examined, this is done to determine the company’s asset value.

Once the company’s assets have been evaluated, they are then sold off under the liquidator’s management. The money obtained from selling these assets is used to pay off all liabilities of the company. Once all assets have been sold and the company’s liabilities have been taken care of, its name is de-registered and the company is shut-down.

In What Order Are Debts Paid Off During Liquidation?

When a company is liquidated, its liabilities are categorized and given priority based on their categorization:

  • First, debts owed to secured creditors are dealt with. Secured creditors can be financial institutions to which the company owes money.
  • After secured creditors, unsecured creditors are given priority. Unsecured creditors include employees. When liquidated, company employees get terminated and their end of service benefits are paid if there is still money left after secured creditors have been paid off.
  • For public companies, stockholders are last in line for receiving money owed to them by the company.

Mandatory liquidation is a messy ordeal. Since it involves legal action, the company in question and its creditors prefer to keep this as a last resort. If a company can reach an agreement with its creditors and satisfy them, mandatory liquidation can be delayed.

 

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