15.11 Types of liquidation

15.11 TYPES OF LIQUIDATION

Voluntary liquidation

It occurs when a company’s shareholders or directors make a voluntary decision to wind up the company’s affairs. It is typically initiated when the company is insolvent or when the shareholders no longer wish to continue operating the business. There are two main forms of voluntary liquidation:

1. Creditors’ Voluntary Liquidation (CVL): A CVL is initiated when the company is insolvent and unable to pay its debts as they become due. In this case, the directors or shareholders hold a meeting and pass a resolution to wind up the company. A liquidator is appointed to sell the company’s assets, and the proceeds are distributed to creditors in a prescribed order of priority. Members’ Voluntary Liquidation (MVL): This type of liquidation is applicable to solvent companies. It is initiated when the shareholders determine that the company has fulfilled its purpose or is no longer viable.
1. Compulsory liquidation:
It is a type of liquidation that is ordered by a court. It occurs when a creditor, shareholder, or regulatory authority files a petition with the court, stating that the company is unable to pay its debts or has acted in a manner prejudicial to the interests of creditors or the public. The court reviews the petition and, if it is satisfied, makes an order for the company to be liquidated. A liquidator is appointed by the court to oversee the process. The liquidator sells the company’s assets, and the proceeds are distributed to creditors according to the prescribed order of priority.