In layman terms, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is a method whereby the corporate structure of the company is dismantled and its property administered for the benefit of the creditors and members.
A liquidator (who is normally an accountant who possesses the pre-requisite license) will be appointed to be in charge of the liquidation process. The liquidator takes full control of the company by collecting and realizing all its assets, settle all the creditors’ claims and distributes the surplus (if any) to its shareholders in accordance with their respective rights accorded under Section 527 of Companies Act 2016.
Modes Of Liquidation
There are generally two (2) categories of liquidation:
Compulsory Winding-Up (also known as Court-Ordered Winding-Up)
a) In insolvency (unable to pay debts)
This is a winding-up of an insolvent company which is triggered by a court order on the application of one or more parties. Such parties may include a creditor, a contributory or the personal representatives of a deceased contributory or the trustee in bankruptcy. This type of winding-up requires the petitioner to state the grounds of winding-up as set out in Section 465(1) of Companies Act 2016
b) On Other Grounds
The court has the power to wind up a company on grounds other than insolvency. The court may instruct a company to wind up simply because of the breakdown of relationship between two groups of shareholders even though the company is solvent. An application has to be made in order to wind up the company stating the grounds for such proceeding in accordance with Section 465 of Companies Act 2016.
a) Members’ Voluntary Liquidation (“MVL”)
MVL is the liquidation of a solvent company where the directors must form an opinion that the company will be able to pay its debts in full within a period of twelve (12) months after commencement of winding-up as stated under Section 443 of CA 2016.
b) Creditors’ Voluntary Liquidation (CVL)
CVL is the liquidation of an insolvent company where the directors will make a declaration stating that the company cannot by its reason of liabilities continue its business. Subsequent to that, a meeting of the company and its creditors will be summoned within one (1) month from the date of the declaration. This declaration must be lodged with the Registrar and the Official Receiver.