Liquidation is a process involving the termination or closing of a business, company or firm; distribution or selling of its property and assets, settling of its liabilities (such as the paying of bills) and distribution of leftover funds to shareholders (creditors are paid first). The business does not have to be bankrupt or insolvent to liquidate.
Following liquidation of specific businesses such as banks, it may be necessary to post a bond to ensure appropriate allotment of assets to creditors. The task of supervising asset distribution may be entrusted with a receiver.
Types of Liquidation
Categories of liquidation are discussed below:
- Voluntary liquidations – These are of two kinds. The first of these and obviously the better of the two is when an owner opts to liquidate while still solvent (debt-free) and following liquidation, is able to pay off all remaining debts. The second kind of voluntary liquidation entails an agreement with one or more creditors to close the business devoid of a formal process. In this rare situation, the proprietor will closely and co-operatively work with one or more creditor agents endeavoring to get the maximum possible returns for all assets.
- Involuntary liquidations – Foreclosure is a forced liquidation whereby the creditor acquires a court order to gain possession of a company’s assets. The creditor will typically appoint an agent to handle this kind of liquidation. If the business or company in question does not co-operate with its lender, the liquidation may be termed “hostile.” Here, the proprietor defies liquidation with unprofessional manner of action. He may refuse to supply necessary information, ignore orderly preparation or carry out some other kinds of disruptive activity. This would only worsen the situation leading to additional legal proceedings and finally, higher costs.
Liquidation is sometimes known by alternative terms such as dissolution or winding-up, though the former technically has to do with the final stage of liquidation.