Winding up or Insolvency is actually a process using which existence of a company is made to an end. It starts when there is an appointment of a liquidator, either by the court or shareholders. The liquidator signifies the interests of every creditor. There are some websites that can better help a business in bankruptcy.
The liquidator administers the liquidation that involves realizing and collecting the company’s properties (converting them into cash), discharging the liabilities of a company, and distributing funds those are left over between the shareholders as per the company’s constitution. After completing these phases, the company is closed formally.
What are the various types of insolvency?
Bankruptcies are classified into two types as per the law: voluntary (which is due to the resolution of a shareholder) or compulsory (by an order of court). Mainly liquidation is also categorized according to whether a company is insolvent or solvent;
If the firm is insolvent, this signifies it is incapable to pay its arrears. In this condition, there is the potential fight between creditors as there might be inadequate assets for every creditor to be fully paid. The law tries to maintain uniformity between creditors that make assets to distribute proportionately as per the size of every creditor’s claim.
Though, the law gives importance to safe creditors (who charge over few of the firm’s property as the debt security). Additionally, a number of laws exist that help creditors (one or more) from gaining a wrong advantage.
Voluntary insolvency (by shareholders decision)
Voluntary insolvency indicates a process whereby a liquidator is appointed by the shareholders, who is then responsible to the shareholders or creditors. It is not essential to make any request to the court for this; though, the liquidator might apply for directions to the court as well as the court has control to eliminate a liquidator.
A voluntary bankruptcy might also begin by a board of directors in case an event indicated in the constitution of a company has occurred. Voluntary liquidation might be in one out of two forms, depending on whether a company is solvent or not.
If the firm is solvent the stockholders can supervise the insolvency. However, if a company is bankrupt, the creditors might take control of the process of liquidation by applying to a court. The court might require proof of insolvency or solvency to determine this issue.
Compulsory insolvency (by court order)
Compulsory insolvency of a company needs obtaining a court order. This process begins with a court application claiming that one or more of the necessary grounds exist. The application might be brought by a company or many directors, or by the Company Registrar or by a creditor. Creditor’s applications are generally the most common and important.
Applications might be brought on many grounds, the most essential being the debts that are unable to pay by the firm. Many factors are there that the court might take into account while choosing an order of compulsory liquidation. The court has option whether to make an order or not.