Liquidation in finance is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. General partners are subject to liquidation.
A company may engage in massive stock liquidation, especially if it wants to cover a lot of existing debts before closing its doors for good. After the creditors are settled, any remaining amount is divided proportionately among the company’s shareholders, according to their shareholdings.
The term liquidation may also be used to refer to the selling of poor-performing goods at a price lower than the cost to the business, or at a price lower than the business desires.
The term liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants.
A bankrupt business is no longer in existence once the liquidation process is complete.
Liquidation can also refer to the process of selling off inventory, usually at steep discounts.
In finance, liquidation happens when a company becomes insolvent, meaning it cannot settle its debts and obligations. Liquidation is normally done voluntarily by the shareholders or as a compulsory process done by creditors, following a court order.
Voluntary liquidation occurs when there is an agreement among all shareholders of a company. The shareholders hold a referendum where they vote to decide whether liquidation should take place. The company then liquidates its assets and frees up its funds to settle any debts. Voluntary liquidation can also be as a result of the main shareholder leaving a firm. The other shareholders can then decide not to continue with the firm’s operations, paving the way for liquidation.
A compulsory liquidation happens when a court orders that a company’s assets be realized and then distributed among the company’s creditors. The procedure starts with the filing of a petition in court. The judge handling the petition then decides and makes a ruling on whether it is appropriate to order a liquidation. When the liquidation is done, the company begins the process of dissolving.
In a compulsory liquidation, a petition is often filed by a creditor. However, the directors, shareholders, or even the company itself can seek to have a company put into a compulsory liquidation.
When liquidation is carried out and a company closes, there can be several advantages. Outstanding debts are written off, providing an opportunity to move on rather than having the entire investment swallowed up by existing debts.
If legal processes have been initiated by creditors, the process of liquidation halts them, terminating legal actions against the company. Another advantage is that leases and purchase agreements can be canceled. The companies making such claims can recover their investments from the insolvency practitioners, together with other creditors.
With liquidation, all business assets are sold off to settle all debts. This means there will be no remaining assets to start a new business. Thus, all the staff members will have to look for other employment. And if a new business proposal comes up, a new process will have to be initiated to find new staff members. This process is tiresome and costly, since the company will have to start from scratch.
The price received for a company's assets can be lower than expected if the sale is conducted on a rush basis. This is because the seller does not have sufficient time to locate the largest possible pool of potential buyers, so that the few buyers contacted can bid lower and still expect to achieve the winning bids. Consequently, a common outcome of liquidation is that no residual funds are left over to pay stockholders. This may also mean that there is not enough cash left to even pay creditors. If so, the secured creditors are paid first, and a reduced payout plan is used to pay any remaining funds to the unsecured creditors.
Also, in the liquidation process, the liquidator can sell the corporate debtor's business as a going concern.