What Is Liquidation?

What Is Liquidation?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Liquidation is a process undertaken by a business when it’s ceasing operations and needs to free up assets to pay off debts. These assets may include property, inventory, equipment, and other tangible goods. The company sells these assets, often at a discount, to quickly generate cash. The cash is then used to repay creditors and shareholders, if there’s any money left after all debts have been paid. The process ends when the business has sold all its assets and fulfilled all of its financial obligations.

Related Questions

1. Is liquidation the same as bankruptcy?

No, they are not the same. Bankruptcy is a legal process that a person or business initiates when they cannot repay their debts. During bankruptcy, the debtor is given the chance to restructure their debts or have them discharged. Liquidation, on the other hand, is often a part of bankruptcy where assets are sold to repay the creditors.

2. What’s a voluntary liquidation?

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In a voluntary liquidation, the shareholders of the company decide to stop all business operations and dissolve the company. Usually, this is done when the company is solvent, and the stakeholders believe it’s the best option to maximize the return of investment.

3. Can a company continue doing business during liquidation?

Generally, no. Once the liquidation process begins, the company usually ceases all functions except for those needed to complete the liquidation process. However, there are exceptions, such as in a partial liquidation, some part of the operations may continue.

4. Who oversees the liquidation process?

A liquidator is assigned to manage the liquidation process. They are responsible for gathering and selling the company’s assets, paying off creditors, and distributing any remaining assets to the shareholders, if any.

5. What happens if the liquidated assets are not enough to repay all debts?

If the proceeds from the liquidated assets fall short of the total owed, the debts are paid off in an order of priority dictated by law. Once these funds are exhausted, any remaining unpaid debts are generally written off, meaning the creditors must absorb the loss.