Our Laws and Politics: Basic Reasons of Liquidation and Dissolution of Companies

The reasons why a company would stop existing are numerous, but basically it might be because of three main reasons. The first range of reasons is because the company has never really had a legal existence (the registration process followed is not consistent with creating a valid legal entity). As an example, the company needs a trading certificate which has to be delivered within 12 months of its registration but does not have it after more than 12 months. In this case, any stakeholder might demand its dissolution. This is only an example of the many reasons which might command company liquidation (redistribution of assets) and the dissolution of the corporate personality (which is incomplete in this case).

The second reason why there could be a liquidation and dissolution is because the company no longer has a reason to exist and the shareholders want it to disappear. The reasons for the founders of a company to decide its dissolution and liquidation range from the fact that, due to restructuring, the company is only a nutshell with no more activity or assets, and therefore it is necessary to eliminate it, down to the fact that the deed of incorporation has come to an end and they do not want to renew it. In all these cases, the company is in bonis and the decision of liquidation or dissolution is taken as a positive strategic move. It does not fall under the provisions of insolvency law which are related to companies having traded while unable to pay for their debts, but this falls under the third case of reasons.

Finally, the third category of grounds why a company could undergo liquidation and dissolution is because the company has done something which enables the state under which it has been created to proceed (mainly insolvency, but also potential social crimes, which might be the same case under certain regulations). In the UK, insolvency is defined by the Insolvency Act 1986 as the inability to pay debts as they fall due (cash flow insolvency) or as the fact that the present and future prospective value of the company's assets is less than the company's liabilities (balance sheet insolvency).