Liquidation or Winding up
Liquidation is the process of winding up or bringing a company to an end i.e. the coming to an end of a limited liability company. It can also be defined as the act of terminating or winding up a company.
The liquidator takes control over the company, assembles its assets, pays debts of the company and finally distributes any surplus amongst the members according to their rights and liabilities.
Forms of Liquidation:
Liquidation of a company can take any of the following forms:
1. Voluntary Liquidation: Voluntary liquidation is the winding up of a company by a resolution of its shareholders. They can wind up the company if the purpose for which it was established has been accomplished or if the company continues to operate at a loss.
2. Voluntary Winding Up, Subject to the Court: This is a voluntary liquidation over which the court exercises supervision. The court can supervise if the shareholders ask the court to do so.
3. Compulsory Winding Up: This is the liquidation of a company as a result of a court order. It is an involuntary winding up.
4. By Order of the Court without Winding Up: The court can order a company to stop operating if the company was formed for an illegal purpose.
5. Name is Removed from the Register: The name of a company can be struck out by the registrar of companies from the register.
6. Insufficient Shareholders: If the number of shareholders falls below the statutory minimum.
7. Failure to Commence Operation on Time: If the company does not commence business within a year of its being incorporated.
Reasons for Winding up a Public Limited Company:
1. If the company passes a resolution to wind up.
2. If the company fails to commence business within a year after its incorporation.
3. If the number of shareholders falls below the statutory level.
4. If the company is insolvent.
Insolvency is a state of financial distress in which a person or business is unable to pay their debts.
5. If the creditors decide to apply for dissolution.
6. Continuous disagreement of the company.
7. A company can be wound up by the order of a court.
8. If the company’s objective becomes illegal.
1. (a) Explain the term debenture.
(b) Mention three types of debenture.
2. Differentiate between private limited and public limited companies.
3. List the necessary documents for the formation of limited companies.
4. Enumerate at least five sources of capital to limited liability companies.
5. Explain the following;
(b) Share certificate
(c) Underwriting of shares
(d) Ordinary shares (WASSCE, June 2004)
6. (a) State three differences between
(i) Shareholders and debenture holders.
(ii) Ordinary shares and preference shares (b) Explain four reasons for winding up a public limited company (WASSCE June 2006)