The Effects of Company Liquidation

The Effects of Company Liquidation

14 February 2022

Liquidations are an important final chapter of a company’s life. The closure of a company, for whatever reason, must be handled carefully and in observance of a series of regulations and protocols. Any company director who ignores these legal obligations will be subject to penalties and personal liabilities.

What is Liquidation?

During liquidation, the company’s assets are sold to pay its debts to its creditors and shareholders. It is also referred to as ‘winding-up’ or ‘dissolution’.

There are two types of liquidation, voluntary liquidation, and involuntary liquidation. Involuntary liquidation is further separated in two, winding up by the court, and creditors’ winding up.

Voluntary liquidation happens when the owner of a company wishes to exit and volunteers to liquidate. Once debts are settled, remaining funds are shared between shareholders and company members.

Involuntary liquidation happens when a company cannot pay back its debts in a timely manner and must therefore sell their assets in order to do so. This can be either ordered by the court or done by creditors.

Why do Businesses go into Liquidation?

There are a number of reasons as to why a business might go into liquidation. Below is a summarised list of a few of the possible reasons:

• The company is unable to pay its debts.
• The company’s liabilities surpass their total assets.
• The company is making a loss without the possibility of recuperation in the foreseeable future.
• The strain and tension of trading proves to be too challenging for directors.
• Trade decline together with the anxiety of wrongful trading.

Effects of Liquidation on the Business

Whether the liquidation is compulsory or voluntary affects the level of control directors of the company have. In compulsory liquidations, directors are left with limited options as Insolvency Practitioners take charge of the company. In voluntary liquidations, directors have more liberties and can progress at their chosen pace.

Liquidation brings a number of benefits and disadvantages for the company. Below are a few examples of both:

Advantages:

• The company is no longer in debt.
• Legal proceedings against the company come to an end.
• Liquidation requires a minimal one-time cost.
• A lease and/or hire can be cancelled.
• Directors have more control in voluntary liquidations.

Disadvantages:

• Any assets owned by the company will be sold.
• The company can potentially be accused of wrongful trading.
• Company employees are made redundant.

How AE Business Advisors can Help

AE’s team of seasoned liquidators is lead by Michael Spiteri Bailey. Michael is currently liquidating Nemea Bank Plc, The European Insurance Group Plc, as well as a number of private equity funds. Michael is one of the liquidators of choice for the Financial Services Authority and is considered to be a safe pair of hands by the courts, the markets and by creditors.

If you are planning to put your company into voluntary liquidation or you need to cause the liquidation of a company on an involuntary basis, we can advise you on what needs to be done and help you with the execution of the liquidation. Call us on +356 2095 8200 or contact us by email on info@ae.com.mt.