Liquidation is the process of gathering and selling a company's assets to pay off its debts to creditors. There are two types of winding up: compulsory winding up and voluntary winding up.
1. Compulsory Winding Up
Compulsory winding up occurs when a court orders the liquidation of a company. This can happen for several reasons, such as:
- The company is unable to pay its debts.
- The company has committed certain illegal activities or misconduct.
- It is just and equitable for the company to be wound up, often due to deadlock or disputes among shareholders.
2. Voluntary Winding Up
Voluntary winding up is initiated by the company's shareholders or directors without court intervention. This type of winding up can be further divided into:
- Members' Voluntary Winding Up: This occurs when the company's shareholders believe that the company is solvent and can pay off all its debts within a specified period, usually 12 months. A declaration of solvency is made, and a liquidator is appointed to oversee the process.
- Creditors' Voluntary Winding Up: This happens when the company is insolvent and unable to pay its debts. The process is initiated by the company's directors and shareholders, but it requires a meeting with creditors to discuss the liquidation and appoint a liquidator. Creditors play a significant role in overseeing the liquidation process.
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