Liquidation

Liquidation refers to the process of winding up a company’s financial affairs and selling its Assets to pay off Creditors. This typically occurs when a company is unable to meet its financial obligations and can no longer operate as a going concern. Liquidation can be voluntary, initiated by the company’s owners, or involuntary, imposed by Creditors or the court.

During liquidation, the company’s Assets are sold, and the proceeds are distributed to Creditors based on the priority of their claims. After all debts are settled, any remaining funds are distributed to Shareholders, if applicable.

Examples:

• Voluntary Liquidation: A small business owner decides to close their shop due to poor sales and initiates a voluntary liquidation to pay off debts and distribute remaining Assets.
• Involuntary Liquidation: A court orders the liquidation of a Corporation after it fails to pay its debts, leading to the sale of its Assets to satisfy Creditor claims.

Cases:

• Company A: After years of losses, Company A’s Shareholders vote for voluntary liquidation. The Assets, including Inventory and equipment, are sold off, and Creditors are paid from the proceeds.
• Company B: Following Bankruptcy proceedings, Company B is subjected to involuntary liquidation by the court, which appoints a Trustee to oversee the sale of Assets and distribution to Creditors.