Compulsory liquidation, also known as involuntary liquidation or winding-up by the court, is a legal process through which a company is forced to close and its assets are sold off to pay its debts. This process is initiated by a court order in response to a petition filed by creditors, shareholders, or regulatory authorities.
Here’s an overview of how compulsory liquidation typically works:
Petition for Compulsory Liquidation: Creditors, shareholders, or regulatory authorities may file a petition with the court requesting the compulsory liquidation of a company. The petition is typically filed when the company is unable to pay its debts as they become due (insolvent).
Court Order: If the court determines that the company is insolvent and that it is just and equitable to wind up the company, it will issue a winding-up order, forcing the company into compulsory liquidation.
Appointment of a Liquidator: Upon the issuance of the winding-up order, a liquidator is appointed to oversee the liquidation process. The liquidator is usually a licensed insolvency practitioner responsible for selling the company’s assets, settling its debts, and distributing any remaining funds to creditors.
Realization of Assets: The liquidator will identify, value, and sell the company’s assets, which include property, equipment, inventory, and intellectual property. The proceeds from the asset sales are used to pay off creditors according to a prescribed order of priority set out in insolvency law.
Distribution to Creditors: Once the assets are sold and the proceeds are collected, the liquidator will distribute the funds to creditors according to the established hierarchy of claims. Secured creditors, such as banks with mortgages or liens on the company’s assets, are typically paid first, followed by unsecured creditors, such as suppliers and trade creditors. Shareholders are usually last in line and may receive payment only if there are funds after satisfying the claims of creditors.
Dissolution: Once all the company’s assets have been liquidated, its debts paid off (to the extent possible), and any surplus distributed, the company is formally dissolved, and its legal existence ceases.