Liquidation
In economics and finance, liquidation refers to the process of terminating a business and sharing all its assets between claimants. This usually happens because the company becomes insolvent (i.e. it is unable to pay its obligations in a timely manner). After a company stops operating, all the assets that remain after the claimants are satisfied, are shared between shareholders and creditors, depending on the priority of their claims. Usually, general partners become subject to liquidation.
Liquidation is also sometimes referred to selling the goods that didn't satisfy consumers and aren’t as popular among them. In this case, underperforming goods are being sold at a price that doesn't satisfy the business.
Process of liquidation
U.S. Bankruptcy Code (namely Chapter 7) governs liquidation proceedings. Companies which have enough assets to meet their liabilities can file for Chapter 7 as well, though those instances are quite rare. Chapter 11, however, helps in reconstructing the company’s debts and rehabilitating the company filed for bankruptcy. In chapter 11 the company still exists even after its products are liquidated and its branches, whose performance is underwhelming, close. So it’s safe to say that there are cases when liquidation is not a part of the bankruptcy process.
Business debts do not evaporate after chapter 11 bankruptcy, they remain until the expiration date of the statute of limitations. In this case there is no debtor that the company owes money to, which means that the creditor will write off the company’s debt.
Keep in mind that liquidating and dissolving a company are two completely different actions. While company liquidation usually means selling its assets to creditors and shareholders, dissolving the company means deregistering it.
Asset distribution during liquidation
The U.S. Department of Justice oversees the process of liquidation. It makes sure that the company’s assets are distributed accordingly with the priorities of different parties. The lenders with the most senior claims can seize the collateral and later sell it at a reduced price. They can recoup the balance from the remaining assets of the company, if the collateral price is low.
The next people who are getting paid during the liquidation process are unsecured creditors, including company employees (if company owes them wages), the government (if company owes it any taxes), and bondholders.
Lastly, in case there are any remaining assets left, shareholders can receive them.
Liquidation of securities
Liquidation can happen when a secured position is being exited. Simply put, the position is being sold for cash. Another way to deal with security liquidation is to take the same, but opposite position in a security.
Positions of the trader can be forcibly liquidated by the broker if either traders are taking a lot of risks or if the trader's portfolio has fallen below the margin requirement.
Example of liquidation
Let us provide an example of the liquidation process in a company.
Company M has been operating for 6 years, and making profits during that time. But because of the economic decline, it faced insolvency and cannot pay off its debts as well as to its suppliers.
The M company then came to the decision to liquidate its business. To do so, it entered into Chapter 7 bankruptcy. Later, the company sold off its assets, including storerooms, hardware, and heavy goods vehicles with a value of $3.5 million. At the moment, M owes $1.5 million to its creditors and $1.5 million to its suppliers. Money from selling assets during liquidation will cover the company's obligations.
Liquidation of a company
A company’s liquidation happens if the assets of a company are sold, the company no longer operates, and it is removed from the register. The company sells assets in order to pay back different claimants. Liquidation happens when the company cannot pay the money it owes and its liabilities.
Money liquidation
Money liquidation refers to converting assets into cash. For instance, an individual can sell their car or house and receive money for it. Note that property assets aren't as liquid as stocks, for example.
