Essentially, liquidation is a lawful procedure through which a corporation or a business is brought to a conclusion. All assets are sold off, and earnings are used to pay its creditors when a company is liquidated. Liquidation is also recognised as winding up, or termination of business. In general, people say that liquidation is a substitute for businesses, which are not capable to disburse their debts. Therefore, the creditors take command of the assets of the corporation, and sell them off to get back the utmost amount that they can. Creditors get the first precedence to whatsoever is sold off. Second precedence in the line is given to the shareholders, who get whatsoever is left, with the favoured shareholders, having first choice over ordinary shareholders.
The liquidation is of two types, compulsory liquidation, and voluntary liquidation. The compulsory liquidation is imposed by the court that orders the company to sell out its assets, and pay off the debt. In the voluntary liquidation, the company voluntary puts a petition in the court. This happens when the company knows that it cannot pay its debt, and has to close the business to pay off. All this happen because of the pressure of the creditors. The voluntary liquidation is possible with the help of shareholders, who after careful evaluation decide to wind-up the business.
- Corporation was integrated as a public company, and has not been issued with a trading certificate (or comparable) within 12 months of registration.
- Company is an old public company. For Example, the one that has not re-registered as a public company, or become a private company under more recent legislation of companies requiring this.
- Company has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time.
- The number of members has fallen below the minimum prescribed by statute.
- The count of members has dropped below the least approved by law.
- Company is just and equitable to wind up itself.
- Company is impartial, and unbiased to wind-up itself.
Usually, the large numbers of applications for compulsory dissolution are filed, as per one of the last two grounds. One thing is very sure that the order from court will not be made if the actual purpose of the application is something else than the termination of the business. For instance, if the application is filed just to enforce the debt, it will not be approved. In case of voluntary liquidation, if the business is solvent, and the member declare solvency by law, the liquidation is then carried out as a voluntary termination of the business. The liquidators are then decided in a general meeting of the company.
In the end, I would like to add that sometimes the term liquidation is used when a company wishes to divest itself of some of its assets. This situation occurs when a retail establishment wishes to close stores. They will sell to a company that specialises in store liquidation, instead of attempting to run a store closure sale themselves.