What is a liquidation?

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What is a liquidation?

Liquidation in finance and economics is the process of closing a business and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. At the end of the company’s activities, the remaining assets are used to pay creditors and shareholders, according to the priority of their claims. General partners are subject to liquidation.

The term liquidation can also be used to refer to the sale of underperforming assets at a price below the cost to the company or at a price below the company’s desires.

Key points to remember

  • The term liquidation in finance and economics refers to the process of closing a business and distributing its assets to claimants.
  • A bankrupt company no longer exists once the liquidation process is complete and it has been deregistered.
  • Liquidation typically occurs during the Chapter 7 bankruptcy process.
  • The product is distributed to the applicants in order of priority. Creditors have priority over shareholders.
  • Liquidation can also refer to the process of selling inventory, usually at deep discounts.

How liquidation works

Chapter 7 of the US Bankruptcy Code governs liquidation proceedings. Creditworthy businesses can also file for Chapter 7, but this is rare. Not all bankruptcies involve liquidation; Chapter 11, for example, involves the rehabilitation of the bankrupt company and the restructuring of its debts. In the event of a Chapter 11 bankruptcy, the business will continue to exist after liquidating any obsolete inventory, closing underperforming branches, and restructuring affected debt.

Unlike individuals filing for Chapter 7 bankruptcy, business debts still exist after Chapter 11 bankruptcy. debtor to pay what is owed, the debt must be canceled by the creditor.

Distribution of assets during liquidation

Assets are distributed based on the priority of claims of different parties, with a trustee appointed by the US Department of Justice overseeing the process. The oldest receivables belong to secured creditors who have security on business loans. These lenders will seize the collateral and resell it, often at a steep discount, due to the short lead times involved. If this does not cover the debt, they will recover the balance of the company’s remaining liquid assets, if any.

Then come the unsecured creditors. These include bondholders, the government (if they owe taxes), and employees (if they owe unpaid wages or other obligations).

Finally, shareholders receive all remaining assets, in the unlikely event that there are any. In such cases, preferred stock investors have priority over common stock holders. Liquidation can also refer to the process of selling inventory, usually at deep discounts. It is not necessary to declare bankruptcy to liquidate the inventory.

Liquidation of securities

Liquidation can also refer to the act of exiting a security position. In simple terms, this means selling the position for cash; another approach is to take an equal but opposite position in the same security, for example by selling short the same number of shares that constitute a long position in a stock.

A broker can forcibly liquidate a trader’s positions if the trader’s portfolio has fallen below the margin requirement, or has shown a reckless approach to risk taking.

Example of liquidation

ABC Company has been in business for 10 years and has generated profits throughout its history. Over the past year, however, the company has struggled financially due to a slowing economy. It has reached a point where ABC can no longer pay any of its debts or cover any of its expenses, such as payments to its suppliers.

ABC decided to close shop and liquidate its business. He enters Chapter 7 bankruptcy and his assets are sold. These include a warehouse, trucks and machinery with a total value of $5 million. Currently, ABC owes $3.5 million to its creditors and $1 million to its suppliers. The sale of its assets during the liquidation process will cover its obligations.

What is a business liquidation?

Liquidation of a company occurs when the assets of the company are sold and the company goes out of business and is delisted. Assets are sold to pay off various claimants, such as creditors and shareholders. The liquidation process occurs when a business is insolvent; he can no longer meet his financial obligations.

What does it mean to liquidate money?

To liquidate means to convert assets into cash. For example, a person can sell their house, car, or other property and receive money for doing so. This is called liquidation. Many assets are valued based on their liquidity. For example, a house is not very liquid because it takes time to sell a house, which involves preparing it for sale, appraising its value, putting it up for sale and finding a buyer. On the other hand, stocks are more liquid because they can be easily sold and the cash received from the sale (if they have appreciated).

Is a company dissolved after liquidation?

No, a company is not dissolved after liquidation. Dissolving a company and liquidating it are two separate procedures. Liquidating a company means selling its assets to plaintiffs while dissolving a company means deregistering it.

The essential

When a company becomes insolvent, that is to say that it can no longer meet its financial obligations, it is put into liquidation. Liquidation is the process of closing a business and distributing its assets to claimants.

The sale of assets serves to pay creditors and shareholders in order of priority. Liquidation is also used to refer to the act of exiting a security position, usually by selling the position for cash.

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