What is Liquidation

It is process of taking over the assets of the company and turning them to cash. This is done either to pay off loans or to increase personal profit. This can be done either by the company or individual or to declare insolvency in order to pay off to the lenders. There are two types of liquidation:

Compulsory liquidation:  this kind of liquidation is done by the court and the laws may vary from country to country. The court usually appoints a receiver who analyzes the assets of the company and decides how it should be handled. The cash recovered from such liquidation is distributed on preferential basis to the stake holders.

Voluntary liquidation: this liquidation may be done for various reasons. Certain companies may go for it when they came to know that the company is degrading. They sell off their assets and quickly pay off they debts as early as possible. Sometimes there can be a liquidation from the creditors side, means the shareholders may decide to wind up the company by selling its assets and pay off the creditors. By doing this the company declares insolvency.

There can be some alternatives to liquidation. This can be done in three ways:

Informal arrangement: the company can enter into a formal agreement with the creditors as to when the payments will be made. This kind of arrangement will be mutually agreed upon by both sides. A proper schedule in writing will be made as to the payments to be made.

Voluntary arrangement by the company: this arrangement is usually done by the court formally, where in the court appoints a representative to value the assets of the company. After this if the stake holders agree with the terms and conditions of the agreement, management can go ahead with the proposed insolvency.

Management: this is one arrangement that gives the company some time from the creditors. The company has certain advantages if they opt for this method. This helps the company to continue as ongoing business until it announces insolvency. Another one is that a better end result can be achieved instead of immediate wind up and it enables the sale of assets for the benefit of preferential creditors.

The process of liquidation is very broad:

  • In the first place a liquidator is appointed either by the shareholders or formally by the court.
  • Secondly the liquidator values the assets of the company and then pays off the creditors on priority.
  • After paying the priority creditors balance if any will be paid to the shareholders by the liquidator.
  • Finally the liquidator declares the company as insolvent and dissolves it.