What Is Liquidation?

What Is Liquidation?

Liquidation definition

Liquidation occurs when a company goes bankrupt and is unable to pay its debt. The company’s activity is extinguished, and the division of capital between shareholders and creditors is carried out according to the order of their credits. In rare cases, solvent companies also require liquidation. Not all failed companies will eventually go into liquidation. Some companies rebuild their businesses and decide to restructure.

Reason for Liquidation

Why the company is forced to liquidate:

• The business was started and run for the wrong reason

• Employers lack skills

• Insufficient working capital

• Weekly financial skills

• Wrong location

• Lack of planning

• Overtrading or under trading

• Bad marketing

• Does not provide strategic direction

• Inflexible business model

• Here are some of the reasons to liquidate a company. Having understood the reason for the payment, let’s understand the type of payment to clarify the concept.

• Form of payment

• Below are three payment types.

• Voluntary liquidation of creditors

• Voluntary liquidation of a creditor occurs when a company’s shareholders decide to liquidate the company holding the shares. However, the company may not be able to pay all creditors. Company directors initiate liquidation of voluntary creditors.

 Voluntary liquidation of partners

• Despite the company’s solvency, the company’s shareholders initiate the voluntary liquidation of the partner. The company has enough cash to close its business without paying creditors. In this type of liquidation, the court conducts the company’s liquidation process. A qualified bankruptcy professional starts the cleanup process. Directors need to prove the value of the company to pay off all of its debts.

Forced Liquidation

The court can liquidate the organization and issue a decision on its forced termination. If someone associated with the company starts a petition, you can take action. It could be a director of a company or a creditor awaiting payment. However, if you have multiple directors, all directors must file the petition together. Creditors first apply in court. Despite the legal warning, the creditor may decide to settle if the debt owed to the creditor remains undisputed, ignored or unpaid.

Once you fully understand payment types, let’s take a look at the payment process.

payment process

The liquidation process legally dissolves the company. The payment process depends on the type of payment. However, it can be summarized as follows:

• Company closes business

• The liquidator obtains ownership of the assets, including the company, records and assets.

• The liquidator verifies the company’s business

• The liquidator creates a list of creditors and debts

• The liquidator draws up a list of debtors who are required to contribute to the value of the asset.

• The liquidator realizes the value of assets owned by the company to settle outstanding debts.

• Creditors will be returned in accordance with established rules

• Surplus funds will be distributed among members

• The liquidator reports to the company’s registrar

• The company will be dissolved 3 months after filing


The company’s compensation process depends on the type of compensation. However, this includes the sale of all shares and assets in the company. The complete dissolution and closure of the company continues. Compensation may be voluntary or compulsory. However, the end result is the same. The creditor receives the maximum amount possible and the company completes the deal.

The liquidator will assume the company’s ownership and property, including records and property.

  • Liquidator investigates the company’s business.
  • The liquidator draws up a list of creditors and debts.
  • The liquidator draws up a list of debtors who are required to contribute to the value of the asset.
  • The liquidator realizes the value of the assets owned by the company to pay off the outstanding debt.
  • Creditors will be reimbursed according to established rules.
  • Surplus funds will be distributed among members.
  • The liquidator submits a report to the company’s registrar.
  • The company is dissolved after a three-month report.

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