Voluntary and Involuntary cessation

Question 1

How does liquidation occur?

Answer 1

Liquidation occurs when an independent and suitably qualified person - the liquidator - is appointed to take control of the business with the intention of selling all the company’s assets in an orderly and fair way in order to pay the creditors.

Question 2

What is receivership?

Answer 2

Receivership is where a business has a receiver take charge of the affairs of the business . Unlike liquidation, the business may not necessarily be wound up.

Question 3

What is voluntary cessation?

Answer 3

voluntary cessation occurs when the owner ceases to operate the business of their own accord.

Question 4

What is involuntary cessation?

Answer 4

involuntary cessation occurs when the owner is forced to cease trading by the creditors of the business.

Question 5

What is liquidation?

Answer 5

Liquidation is turning assets into something liquid (cash) that can be spent. This money is then distributed through a hierarchy of people entitled to payments. Firstly there is business debt, meaning money will firstly be given to suppliers and loaners etc., next to be paid is employees and their entitlements, and lastly their is money left over. However if a business involuntarily closes most of the time lenders won’t be paid and employees won’t get their entitlements as in the end their isn’t enough money.

Question 6

the method of cessation for a sole trader or partnership:

Answer 6

Sole trader/partnership –> bankruptcy : which then will lead to either voluntary or involuntary cessation.

Question 7

the method of cessation for private or public companies:

Answer 7

Private/public company –> voluntary administration –> liquidation: which will then lead to either voluntary or involuntary cessation.

Question 8

What are creditors?

Answer 8

creditors - people involved in the business who are owed money such as shareholders and banks

Question 9

What is bankruptcy?

Answer 9

Bankruptcy - declaration that a business or person is unable to pay his or her debts

Question 10

What is realisation?

Answer 10

Realisation - the process of converting the assets of a business into cash

Question 11

What happens when a business experiences financial difficulty?

Answer 11

When a business is experiencing financial difficulty it has 2 options;
Voluntary Administration - occurs when an independent administrator is appointed to operate the business in hopes of trading out any of the present financial problems
Liquidation - occurs when an independent person is appointed to take control of the business with the intention of selling the assets to pay the creditors