What Is Liquidation? Guide to Business Liquidation

Liquidation is when a company is voluntarily or involuntarily declared insolvent—meaning that it cannot pay its debts back in a timely manner—and the company’s assets are sold off to pay its creditors, shareholders, and claimants, effectively dissolving the company. Liquidation can be applicable to both small businesses and large, public companies. It can be an exit strategy for a business that is insolvent and no longer profitable, though solvent companies may also be liquidated.

There are different types of liquidation used for a variety of purposes. The most common types of liquidation are compulsory liquidation, members’ voluntary liquidation, and creditors’ voluntary liquidation.

1. 1. Compulsory liquidation: Compulsory liquidation occurs when creditors or lenders petition to liquidate a business if their debts are not paid within a short amount of time, which forces a business to sell off its assets in order to pay back its creditors. If you have an insolvent company—meaning that your company cannot pay its debt—you may be forced to liquidate if you have failed to pay back your debts in a timely manner.
2. 2. Members’ voluntary liquidation: In some cases, a solvent business whose owner wants to exit the company may volunteer to liquidate it. In this process, 75 percent of the company’s members must vote to liquidate it, then a liquidator is appointed to settle the company’s debts and legal disputes. Leftover funds are distributed to the company shareholders and members.
3. 3. Creditors’ voluntary liquidation: A creditors’ voluntary liquidation occurs when a company’s directors realize that they won’t be able to pay its debts on time, or their liabilities now exceed the asset value. The company directors appoint a liquidator to settle their company’s legal disputes or debts, after which the directors are obliged to cooperate with the liquidation process in order to pay back their debts.

After liquidating or “winding up,” a company essentially dissolves and can no longer operate its business. Unlike bankruptcy, in which a company may gain a fresh start after the process, liquidation means a company must cease operation permanently. In some cases, like with retailers, a company may only partially liquidate, choosing to close down underperforming stores in order to divert resources to more profitable locations.

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