Liquidation is the process of winding up or bringing a company to an end, i.e ., the coming to an end of a limited liability company. It can also be defined as the act of terminating or winding up of a company. Liquidation is the termination of a company when it has completed the business for which it was created, when the members of the company decide to withdraw from business or when it is unable to meet its obligation.
Forms of Liquidation
Liquidation of a company can take any of the following forms:
- Voluntary Liquidation: Voluntary liquidation is the winding up of a company by a resolution of its shareholders. They can wind up the company if the purpose for which it was established has been accomplished or if the company continues to operate at a loss.
- Voluntary Winding Up, Subject to the Court: This is a voluntary liquidation over which the court exercises supervision. The court can supervise if the shareholders ask the court to do so. The court will not give the order unless the petitions can show very good reasons to convince the court.
- Compulsory Winding Up: Compulsory winding up is the liquidation of a company as a result of a court order. It is an involuntary winding up. It may be because the number of members fall below the required number, it cannot raise enough capital or it cannot pay its debt.
- By Order of the Court Without Winding Up: The court can order a company to stop operating if the company was formed for illegal purposes.
- Name is Removed from the Register: The name of a company can be struck out by the registrar of companies from the register.
- Insufficient Shareholders: If the number of shareholders fall below the statutory minimum.
- Failure to Commence Operation on Time: If the company does not commence business within a year of its being incorporated.
Reasons for Winding up a Public Limited Company
- If the company passes a resolution to wind up.
- If the company fails to commence business within a year after its incorporation.
- If the number of shareholders falls below the statutory level.
- If the company is insolvent.
- If the creditors decide to apply for dissolution.
- Continuous disagreement between the directors over the management of the company.
- A company can be wound up by the order of a court.
- If the company’s objective becomes illegal.
- If the company cannot meet up with the capital requirement for its line of business.
TERMS ASSOCIATED WITH COMPANIES
- Fixed Assets: These are assets that can last for a long period of time. They are used for future production, e.g. furniture and fittings, machineries etc.
- Current Assets: Current assets are assets that can last for a short period of time, e.g. stock, cash at hand, cash in bank.
- Authorised Capital: Authorised capital is the total amount stated in the Memorandum of Association and approved by the registrar of companies which a company can issue out.
- Issued Capital: Issued capital is part of nominal capital that directors decide to issue to the public for subscription.
- Reserves: Reserves are allocation of funds usually to build up the financial strength of the company by retaining funds to invest in the business instead of being distributed as dividend.
- Loan Capital: Loan capital is the total amount of money the business borrowed from external sources, e.g. debenture.
- Current Liabilities: These are liabilities which are payable within a short period, usually a year, e.g. creditors, loan etc.
- Intangible Assets: These are assets that cannot be seen and touched, although they have value, e.g. goodwill, patent, copyright, etc.
- Promoter: Promoter is the person who does the necessary preliminary work in forming or floating a company.
- Shares at Par: This simply means shares are issued to the public at the actual price, the nominal price is equal to the issuing price.
- Shares at a Premium: This simply means shares are issued at a premium when the issuing value is more than the nominal value.
- Shares at a Discount: Shares at a discount means that shares are quoted below the nominal value.
- Dividend: Dividend is a share of profits of a company paid to a shareholder as returns on his investment in the company.