Voluntary Liquidation During COVID-19: A Brief Overview

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Emily WilsonBusiness Psychologist

Thursday, May 28, 2020

The COVID-19 pandemic is definitely a massive event, not just from a health standpoint but global economics, as well. In order to soften this blow, governments and international financial institutions are passing various laws and legislations, helping companies get through this rough patch and allow them to get back on track. One such method is the voluntary liquidation of companies.

Article 4 Minutes

Here are several things you need to know about voluntary liquidation in order to make the most of it:

What is liquidation?

Liquidation is a process in which a company processes all its existing assets into cash so it can settle any financial obligations they would otherwise be unable to handle. This is so important at the moment because COVID-19 is putting a lot of enterprises in a tight spot, financially. The infrastructure of doing business has changed dramatically, especially in the field of shipping, hospitality, tourism, retail and education. Sure, the popularity of online courses has surged but keep in mind that traditional education is still on the back foot.

Voluntary liquidation

The most common types of voluntary liquidation are:

  1. Members voluntary liquidation (reserved for companies with no debts)
  2. Creditors voluntary liquidation (reserved for companies with debts).

Members voluntary liquidation is a scenario in which owners and shareholders decide to sell their business and all of its assets in order to pay their creditors. This can be a good idea for many as it doesn’t involve the court, which means there are fewer fees to pay. The process is also a lot quicker, which is why it’s seen as a preferable solution to compulsory liquidation.

The problem and the solution

Some countries, even if they’re considered the world’s largest trading hubs, often have no formal procedures to govern things like bankruptcy (for instance, Chapter 11 of the United States Bankruptcy Code). This means that businesses may find themselves in a situation where creditors can proceed with the compulsory liquidation of assets at their own behest. In order to save their economy, as well as people who currently serve as its backbone, some countries that lack this legislative structure will have to start passing these regulations. The first thing that needs to be addressed is the issue of insolvent trading provisions.

Some countries, like Australia, have quite tough insolvent trading laws. Needless to say, this is where these changes are needed the most. Even without fraudulent intention, if a company is trading while insolvent, the director may be unable to avoid prosecution. Since September 2017, there's been the so-called safe harbor defense on the personal liability of directors under specific circumstances. With this crisis at hand, nonetheless, this might be finally put to the test.

Temporary measures

Another major issue is the temporary measures for both individuals and businesses affected by the financial repercussions of COVID-19. One of the proposed measures to help individuals get through this rough spot is to raise a personal bankruptcy threshold from $15,000 to $60,000, giving individuals a lot more breathing space. For small businesses, the threshold should be raised from $10,000 to $100,000. Not only that but the statutory period to respond to these demands is proposed to be raised from 21 days to 6 months.

The biggest problem, however, lies in the fact that there is a lot of room for abuse of these relief measures. This is why people behind these institutions need to be held criminally liable if debts in question are incurred fraudulently. In order to avoid errors from the opposite party, assessors need to be appointed carefully and by an appropriate government body. As we’ve already mentioned, these measures are temporary which means there’s always the question of how long they’ll remain in effect.

Having a plan

Even though they can be of immense help, no government measure can save a business whose executives don’t have a plan of their own. Directors need to have their own plan of how to get out through these difficulties. They need to review all relevant transactions and develop a completely new cash flow projection. They might also want to look for professional advice on the subject matter. Most importantly, they need to keep their team on-board and the best way to do so is with a clear and transparent agenda and regular meetings where updates will be shared.

Final thoughts

One thing is certain; the business world needs to stay functional even after this pandemic. This is why it’s so important to give businesses, directors and shareholders some maneuvering space; a lifeline to help them deal with the problems that they’re currently encountering. Still, there’s only so much that these regulations can do and it’s the duty of directors to be proactive in monitoring changes, and respond to them accordingly.

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Emily Wilson

Business Psychologist

Emily is a business psychologist with a passion for marketing. Researching, exploring and writing are her favorite things to do. Besides that, she loves animals, music and traveling.

 

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