WHAT ARE THE THREE TYPE OF LIQUIDATION?
Types of Liquidation
There are three main types of liquidation:
- Members’ voluntary liquidation (MVL)
- Creditors’ voluntary liquidation (CVL)
- Compulsory liquidation
Members' Voluntary Liquidation (MVL)
A members’ voluntary liquidation (MVL) is a liquidation that is initiated by the members of a company. It is a solvent liquidation, which means that the company has enough assets to pay its debts in full.
The process of an MVL is as follows:
- The members of the company pass a resolution to wind up the company.
- A liquidator is appointed to oversee the liquidation process.
- The liquidator collects the company’s assets and sells them.
- The proceeds of the sale are used to pay the company’s debts.
- Any remaining assets are distributed to the members of the company.
Creditors' Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation (CVL) is a liquidation that is initiated by the creditors of a company. It is an insolvent liquidation, which means that the company does not have enough assets to pay its debts in full.
The process of a CVL is as follows:
- The creditors of the company pass a resolution to wind up the company.
- A liquidator is appointed to oversee the liquidation process.
- The liquidator collects the company’s assets and sells them.
- The proceeds of the sale are used to pay the company’s debts.
- Any remaining assets are distributed to the creditors of the company.
Compulsory Liquidation
A compulsory liquidation is a liquidation that is ordered by the court. It can be ordered in a number of circumstances, such as if the company is insolvent, if it is unable to pay its debts, or if it has committed a breach of the Companies Act.
The process of a compulsory liquidation is as follows:
- A creditor or shareholder of the company can apply to the court for a winding-up order.
- The court will consider the application and make a decision whether or not to grant a winding-up order.
- If a winding-up order is granted, a liquidator will be appointed to oversee the liquidation process.
- The liquidator will collect the company’s assets and sell them.
- The proceeds of the sale are used to pay the company’s debts.
- Any remaining assets are distributed to the creditors of the company.
Conclusion
The three types of liquidation are different in terms of how they are initiated and how they are carried out. The choice of which type of liquidation to use will depend on the specific circumstances of the company.
Here are some additional points to keep in mind about liquidation:
- The liquidation process can be complex and time-consuming.
- The liquidator will have the power to investigate the affairs of the company and to take legal action against directors and shareholders who have acted improperly.
- The liquidation process can have a significant impact on the creditors of the company.
some of the advantages and disadvantages of the three types of liquidation:
Members' Voluntary Liquidation (MVL)
Advantages:
- Control. The members of the company retain control over the liquidation process.
- Speed. The liquidation process can be completed more quickly than a CVL or a compulsory liquidation.
- Cost. The cost of an MVL is typically lower than the cost of a CVL or a compulsory liquidation.
Disadvantages
- Debts. If the company does not have enough assets to pay its debts in full, the members may be personally liable for the remaining debts.
- Tax. The members may be liable for capital gains tax on any assets that they receive from the liquidation.
Creditors' Voluntary Liquidation (CVL)
Advantages:
- Protection for creditors. The creditors of the company are protected in a CVL, as the liquidator will be responsible for distributing the company’s assets in accordance with the law.
- Speed. The liquidation process can be completed more quickly than a compulsory liquidation
Disadvantages:
- Loss of control. The creditors of the company do not have control over the liquidation process.
- Cost. The cost of a CVL is typically higher than the cost of an MVL.
Compulsory Liquidation
Advantages
- Protection for creditors. The creditors of the company are protected in a compulsory liquidation, as the liquidator will be responsible for distributing the company’s assets in accordance with the law.
- Court oversight. The liquidation process is overseen by the court, which provides some level of protection for the creditors.
Disadvantages:
- Loss of control. The creditors of the company do not have control over the liquidation process.
- Cost. The cost of a compulsory liquidation is typically higher than the cost of an MVL or a CVL.
