Liquidation is the process of selling a company’s assets to pay off creditors and individuals with claims against it. It can be compulsory or voluntary, with reasons including bankruptcy, legal issues, or a lack of desire to continue operating. Rules vary globally, and proceedings are typically initiated by the company, shareholders, or creditors. Insolvent companies may also be required to liquidate. Shareholders may voluntarily liquidate a business, such as after a particular event or to raise retirement funds.
Liquidation occurs when a company or organization closes, its assets are sold, and the proceeds of the sale are distributed to creditors and other individuals or entities with claims against the company. Some liquidations are compulsory, in which case the process occurs following a court order. Other liquidations are voluntary, in which case the people running the organization decide to stop operations. Among the most common reasons for liquidation are bankruptcy, legal troubles, or a lack of desire among the people managing the entity to keep it operating.
Rules regarding orderly liquidations vary around the world, but these proceedings can typically be initiated by the company itself, its shareholders or its creditors. The party wishing to initiate proceedings must file a court statement explaining the reason for the liquidation and if the judge approves the application, the business must cease operations and administrators are normally appointed by the court to oversee the sale of its assets. The court has often ordered liquidations when the people who control a business fail to issue stock certificates to shareholders or due to a company failing to pay its creditors. The administrator-appointed court hears claims filed about the entity’s assets and settles claims based on the seniority of claims, which generally means that creditors are paid before shareholders.
Business bankruptcies usually result in liquidations, but laws in many places also require that insolvent but not yet bankrupt businesses to liquidate. Firms are technically insolvent when they lack sufficient revenue to cover debt obligations. Insurance companies and other financial companies are often subject to compulsory liquidation in the event of insolvency.
Some long-standing companies are wound up when changes in the law mean that the business can no longer continue to operate. Enterprises engaged in illegal activities must cease operations and liquidate to avoid prosecution of illegal acts. Other companies go out of business and go into liquidation following changes to the law that make a particular business model obsolete. This often occurs when laws relating to imports, exports and information sharing change and the companies that used to provide technology to support the previous laws no longer exist.
Voluntary liquidations sometimes occur because shareholders in a failing business close a business before it goes bankrupt, but in other situations, shareholders or company owners voluntarily liquidate a business. If a business was created to provide services for a particular event, the owners of the business usually liquidate it after the event it was created for. In other situations, entrepreneurs who want to retire but are unable to find suitable buyers for a business decide to liquidate the company to raise retirement funds.
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