Voluntary Liquidation
Voluntary liquidation is the process of winding up the activities of an insolvent company due to lack of funds. In this process, the assets of the company, such as property and cash, are sold to pay off debts and other liabilities. The remaining funds are distributed to the creditors, after deducting the taxes and other charges incurred.
When a company faces insolvency, it can opt to enter voluntary liquidation either through a Creditors’ voluntary liquidation (CVL) or a Members’ voluntary liquidation (MVL). These are processes devised to pay creditors in full following the sale of assets by the company.
In the event of CVL, the creditors nominate a licensed insolvency practitioner to manage the liquidation process and the accounts of the company. He would then oversee the sale of assets in order to pay creditors and any other costs incurred. The remaining funds are distributed among creditors based on the provisions of the Insolvency Act of 1986.
In MVL, the liquidation is initiated by the company and is held when the directors believe that the company cannot continue to pay its liabilities. In this case,the directors would contact a licensed insolvency practitioner who would then proceed to appoint a liquidator. The appointed liquidator then assesses the financial stability of the company, attempts to pay its creditors in full, and distributes the remainder of the funds among shareholders.
Voluntary liquidation is generally beneficial to a company since it can protect it from potential legal actions by creditors. Creditors would not be able to pursue legal action against the company since they assume that the liquidation process will be successful. Similarly, businesses that opt for voluntary liquidation are able to still operate and make profits in the interim.
Overall, voluntary liquidation is a beneficial process that allows businesses to pay their creditors in full and still continue to operate during the liquidation process. It is an attractive option since businesses can protect themselves from potential legal actions by creditors and still have access to the much-needed liquidity during the liquidation process.
