There comes an unlikely event in a company’s lifetime where it would face the possibility of liquidation. This is often brought about by a progressive decline in sales, losses, rising liabilities and other unwanted circumstances. When things get worse and a company is deemed insolvent even after several attempts and after careful perusal of its affairs, a creditors’ voluntary liquidation is necessary otherwise you might just get yourself, the directors and the shareholders one big massive headache. But what is it really?
A creditors’ voluntary liquidation is one of the two types of voluntary liquidations. Unlike the other kind, this one is undertaken by a company that is deemed insolvent. This means that the company and its officers, after having examined the state of its financial affairs, have deduced that its assets cannot anymore suffice for its present and maturing liabilities nor do its cash inflows exceed the outflows.
Under this process the company files for a state of insolvency and when such has been approved and validated, a liquidator is appointed to handle the process of liquidation and winding up. The liquidator is tasked with several responsibilities and the most notable of all would have to be the selling off of the corporate assets and the distribution of its proceeds to the respective stakeholders in an order of succession where creditors are favored over shareholders and owners.
So why does a creditors’ voluntary liquidation able to save insolvent companies from a big headache? It should be noted that it is illegal under the law to continue operations when one is insolvent. It can constitute fraud in the part of the business. Likewise, it is to be noted that directors have the responsibility to safeguard the interest of the corporate creditors. Operating under a state of insolvency violates this and thus is able to hold the directors and officers liable up to their personal assets and properties.
Additionally, it is better to formally and calmly wind up operations. If you do not do so, disgruntled creditors can file a petition in court where an order enforces a forced and compulsory liquidation. Under this, the business loses the power to appoint a liquidator and it also crumbles whatever remaining image the company has.
But is a creditors’ voluntary liquidation the best option for distressed companies? It depends. There are indeed other business recovery options and it is advisable to talk to an industry professional, consultant and advisor first before making any abrupt decisions.