Liquidation is one option that a business can use to avoid bankruptcy. It is the process of winding up a company's financial affairs by selling off company assets to pay off their creditors. When a company goes through liquidation, it does not necessary mean that it's closing down for good but for the time being while its assets are being liquidated, it will have to temporarily cease business. There are two different types of liquidation:

Voluntary liquidation

With voluntary liquidation, the shareholders or partners collectively agree on the liquidation and the rate of the assets to be sold off. Voluntary liquidation may take place in one of two ways, depending on whether the company is solvent or insolvent. If the company is solvent the shareholders can control the liquidation. On the other hand, if the company is insolvent, the creditors may take control of the liquidation process by applying to the court. The court will demand proof of solvency or insolvency to determine this issue.

If the company is insolvent, this means it is unable to pay its debts. In this condition there would be conflict between creditors as there will be insufficient assets for all creditors to be paid in full.

Compulsory liquidation

This type of liquidation is ordered by the court. There are a number of factors that the court will take into account when deciding to make a compulsory liquidation order.

Liquidation process

• The first thing that takes place when the liquidation process begins is that the controls of the company are handed over to a liquidator, who will oversee the actual liquidation process. A liquidator is appointed, either by the company shareholders (voluntary liquidation) or by the Court order (compulsory liquidation).
• The liquidator collects the assets of the company (including uncalled capital; that is, amounts unpaid on shares) and pays the creditors in order of priority.
• The liquidator distributes any extra funds to the shareholders.
• The company is then officially dissolved.

The reasons that a company can end up in liquidation are many, for example:

• Inability to pay debts
• Liabilities exceed assets
• Internal disputes that would make it impossible to carry on business etc.   

Many companies come out from the liquidation process, move ahead and flourish and are able to make a new start without being held back by its debts. If your company is going through liquidation, it's not the end of the world, you can make it through. You need to be resilient and learn from your mistakes.

Sources:

• Corpcover 
• Interpret
• Worrells
• Howtolaw
• Heckroodtlaw