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 company’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 compromises 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
The dispersion of assets is overseen by a trustee of the Department of Justice. They prioritize this process by assigning the most senior claims to the secured creditors and shareholders, which in turn sell the collateral. If that does not cover the costs of the debt, they will recoup the balance from the remaining assets. The next assets are given 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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