Liquidation is the winding up of a company by distributing the proceeds realised from the sale of the company’s assets to its creditors. It is done in the order of priority and the surplus to the owners according to their rights and interest.
Types of Liquidation
Voluntary Liquidation
In this type of liquidation, the creditors or members (shareholders) of the company may pass a special resolution to wind up the company, and the process of liquidation commences right from the time of passing the resolution.
There are two types of liquidation – Members’ Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL).
1. Members’ Voluntary Liquidation
This is an appropriate way to liquidate a solvent company and can be deployed as an exit strategy. It is adopted when the company can pay its debts in full within 12 months after the commencement of winding up. The directors of the company are required to file a declaration of solvency. The members may decide to liquidate to extract value from the cash and assets held by the company. The company appoints the liquidator. The typical reasons for MVL are:
- The company has ceased trading activities
- Management deadlock or shareholder dispute
- Restructuring for management efficiency
- To achieve tax efficiency by minimising the liability or by maximising the advantage of tax benefits.
2. Creditors Voluntary Liquidation
If a company is insolvent, its directors can convene a meeting of the company’s creditors to consider its proposal for voluntary liquidation. On passing a resolution in favour of the liquidation the company will appoint a liquidator, subject to the approval of the creditors. Directors of a company that is distressed with debts and liabilities may choose this route to write-off the debts while appropriately addressing the creditors that they have not personally guaranteed.
In the case of MVL, if no declaration of solvency is submitted by the directors or if the liquidator is satisfied that the company will not be able to pay its debt in full within 12 months after commencement of winding up then the liquidation will proceed as CVL.
It is advisable to have professional experts involved in the discussion of decisions relating to liquidation of insolvent companies as they are more complicated and the exposure of the directors to the risk of personal liability remains high.
Read the full version of this article about liquidation at Singapore Tax & Accounting Services website.
