Company Liquidation – What you need to know about

The unthinkable has finally happened. Maybe you hadn’t planned for things to turn out the way it did, maybe your strategy was not very well thought of, whatever the shortcoming was – now your company has run its course and you have no choice but to liquidate.

Company Liquidation is the process of realizing all assets and the discharging of all liabilities in concluding the affairs of a business.

What makes a Company Liquidate?

If we are to analyze the reasons behind what would generally make a company liquidate, we can identify a few common issues.

1. Starting a Business for the Wrong Reason
   Some businesses are started off as a hobby and merely sits in stagnancy, simply because it was set up out of necessity – and not of an identified profitable opportunity.
2. Lack of Capital
   Sometimes most businesses tend to miscalculate the amount of money it may cost them to set up/run. This in turn could have detrimental effects on the establishment as a whole and might result in a much earlier liquidation.
3. Lack of Successful Marketing
   Any business, regardless of how big or small, requires well thought out marketing strategies in order to grow and reach out to their target audiences. This is a key issue that may lead to most companies being unsuccessful.
4. Unexplored Opportunity
   In some cases, blinded by optimism, a business is set up without fully realizing the opportunity that the business has – and manages to wrongly select the location, and even the product or service offered when being established.

What is the Process of Liquidation?

The steps a company should take to liquidate depends on the type of liquidation, and whether or not the company was forced into it by the creditors or simply decided to liquidate on their own accord.

The Strike Off Procedure

Liquidation is deemed a possibility for a business if it is eligible for a “Strike Off”. Eligibility is determined by the Accounting and Corporate Regulatory Authority, and if all requirements are
met, the firm involved will begin the preparation of documents and accounts needed for liquidation.

During a “Strike Off”, all existing bank accounts that may have any relation to the business needs to be closed, and necessary documentation provided as proof (eg: bank statements etc.)
The documentation required for the process of “Strike Off” include,

• The Declaration of Strike Off
• The Application for Strike Off
• Tax Clearance details (if applicable)
• A recent copy of an Audited Report (if the company has previously filed audited accounts)
• A copy of the Company Certificate (if the private company has no assets or liabilities)
• The Last Annual Return of the company

(If there are indeed any assets or liabilities, the Directors should provide proof on how they will be disposed of)

Compulsory Liquidation

This type of liquidation forces the company to liquidate it’s assets on the orders of a “court of Creditors”, and the direction of an assigned “Liquidator”.

Steps

1. The creditors present a petition to the court and request an ordered liquidation (Note that the court has to approve this request as if the creditors are found to be unreasonably refraining from alternative measures, the request can be dismissed)
2. If approved, the court appoints one or more Liquidator along with an Official Receiver – who will begin valuing, marketing and selling the Company’s assets. (The creditors may intervene and assign their own liquidator during this process, and as a business owner/director your best option is to seek guidance from an “Insolvency Practitioner” who’ll help mitigate potential negative outcomes of compulsory liquidation. )

Outcomes

Once all assets have been liquidated, even though directors of limited liability companies are not usually held personally liable, if the court accuses any director of wrongful trading, they will be subjected to make a payment to the company.

Voluntary Liquidation

1. Members’ Voluntary (Solvent) Liquidation (MVL)

If the shareholders themselves voluntarily decide to liquidate their assets, then they may appoint a liquidator to realize the assets of the business and distribute the proceeds among the company members. This form of liquidation will allow you to extract the value of the business in the form of cash, and even save you money on taxation (as instead of being charged an Income Tax, you’ll be charged a Capital Gains Tax).

2. Creditors’ Voluntary (Insolvent) Liquidation (CVL)

This form is very similar to Members’ Voluntary Liquidation, except for the fact that the company entering into liquidation is insolvent, and all the assets of the company will go to the creditors of the company (not the members).

And there you have it, the somewhat complicated procedure of company liquidation simplified!

What happens after Company Liquidation?

After following up the procedure of liquidation as prescribed by the law the registrar of Companies in Sri Lanka finally issues a Certificate stating that the company is finally wound up and dissolved. This is the death certificate of the company so it is recorded in the files maintained by the registrar in the Company. This avoids the Company from taking part actively in trade and protects the community from fraud.