Whether you are a businessman, a budding entrepreneur, a commerce student, an investor or plain right curious, a creditors’ voluntary liquidation is something that you have to know about when it comes to the field and industry of businesses and entrepreneurial ventures.
As we all know, an entity comes to its demise when it can no longer fulfill its obligations as they mature. To avoid it one has to know how insolvency creeps in and what its warnings signs are. AT the same time, it also has to know what recovery options it has in order to stop or at least lessen the negative effects it has on the company.
A Creditors’ Voluntary Liquidation is one of the most common solutions to formally and legally wind down operations. Below are five things about it that you need to know about.
- 1. It is voluntary as the name suggests.
Unlike a winding up petition, this one is fully voluntary with majority of the directors voting for it. It is important to take note however that insolvency has to be proven beyond reasonable doubt. This will then call for the members to again vote for a licensed insolvency practitioner or liquidator to attend to the procedures.
- 2. It calls for the sale of all corporate owned assets.
All assets owned by the entity shall be sold with its proceeds to be paid out to stakeholders. Owners and directors will not be held personally accountable unless proven to be at intentional fault.
- 3. It necessitates prioritization of creditors.
The proceeds from the sale of the corporate assets shall be distributed in proportion to the interests of the stakeholders. Priority is first and foremost given to the creditors. Any excess should there be are to be given to shareholders.
- 4. It cancels contracts regarding future services.
Any contracts with other businesses regarding future services would be made unenforceable given the company’s inability to fulfill them. This is why insolvency has to be validated because no business should use a Creditors’ Voluntary Liquidation in order to avoid and escape from their debts.
- 5. It will cease operations.
Essentially, once a Creditors’ Voluntary Liquidation has been set in motion, it will formally wind down operations, cease trade and close down the company. It may be a hard pick but then again doing so would be much bearable compared to when a Winding Up Petition in Court would force one to liquidate.