Definition
Liquidation, or “winding up”, has to do with solvency and insolvency. A company is solvent if it can pay its debts, and insolvent if they cannot. When insolvent and unable to pay its obligation, a firm’s assets are liquidated, meaning they are divided among shareholders and creditors.
When this occurs, a liquidation officer is appointed to collect the assets before dissolving the company. He requires sanction to pay creditors and to make agreements or arrangements with creditors. Without sanction the liquidator may carry on legal and business proceedings, sell the property, claim against insolvent contributors, or raise money on security of company assets.
Dispersion of Assets
A trustee of the Department of Justice will oversee the distribution of assets in the liquidated company. Moreover, they prioritize this process by assigning the most senior claims to the secured creditors and shareholders, which in turn sell the collateral. In case that does not cover the costs of the debt the liquidated company owes, they will recoup the balance from the remaining assets. Consequently, they will give the next assets to the unsecured creditors including bondholders, government, and employees. Then, shareholders receive the remaining assets if any. Investors have priority over holders of common stock.
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