Liquidation

Liquidation Meaning

Liquidation is a process of winding up of a business or a segment of the business by selling off its assets to generate cash flow and use the cash flow to pay off the creditors and all other liabilities of the business in a specific order.

In this process, the assets of the business are sold and the cash flow generated is used to pay off the liabilities of the companyLiabilities Of The CompanyLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more which leads to an end to the operations of the company and therefore the name of the company is also removed from the register of companies.

Procedure of Liquidation

The general process for liquidation of the company is as follows,

Liquidation (Main)

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Payments During Liquidation

The priority of payments can be as follows,

  1. Insolvency professional cost and cost of liquidation.
  2. Workmen dues and debt due (24 months) to secured creditors.
  3. Dues of employees other than workmen (12 months)
  4. Unsecured financial creditors.
  5. Government dues and unpaid dues to secured creditors upon realization of security.
  6. Remaining debts and dues.
  7. Preference shareholders.
  8. Equity Shareholders.

Types of Liquidation

Types of Liquidation

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#1 – Compulsory

In this case, the financial creditors appeal to the court for the liquidation of the company as they believe that the company will not be able to pay off all the debts and creditors.

#2 – Members Voluntary

In this case, the company is solvent and therefore can pay off all their liabilities such liquidation occurs by consent of all members due to reason like completion of the purpose of formulation of company, transfer of business, etc.

#3 – Creditors Voluntary Liquidation

In this case, the company is insolvent and it himself initiates this process to avoid compulsory liquidation and court intervention in this process.

We can conclude from above that there is no intervention of the court in the creditor’s voluntary and the member’s voluntary liquidation.

Consequences

Conclusion

After understanding about the meaning, process and consequences of liquidation we can conclude that it is a formal process in which the assets of the company are liquidated and used to pay off the liabilities which leads to an end in the operation of the company’s business and also the existence of the company comes to an end.

Recommended Articles

This has been a guide to liquidation and it’s meaning. Here we discuss procedure and types (Compulsory, Members Voluntary and Voluntary) of liquidation with their consequences. You can learn more about financing from the following articles –

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