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Liquidation is the process of selling off a company's assets and allocating the money to creditors and shareholders. Typically, this happens after the company files for bankruptcy or decides to wind down its activities. It is a legal procedure that entails the sale of property in order to raise money and settle debts.
Auctions, private sales, and bankruptcy court are just a few of the different ways that assets might be liquidated. Prior to paying off unsecured creditors, such as banks and other lenders that hold collateral on the assets, the profits from the sale of the assets are used to settle secured creditors. According to the bankruptcy code's priority system, any residual funds are subsequently divided into unsecured creditors like vendors, workers, and investors.
Since they are regarded as the owners of the company and only have a right to a part of the remaining assets after all other creditors have been paid, shareholders are often the last to get any proceeds from liquidation.
Liquidation comes in two primary flavors: voluntary and involuntary. When a business decides to wind down operations and dispose of its assets, it enters into voluntary liquidation. This could happen for a number of reasons, like budgetary constraints, shifting market dynamics, or tactical choices. On the other hand, involuntary liquidation happens when a business is compelled to sell its assets by a court order or by creditors who have filed a lawsuit.
One advantage of liquidation is that it offers a planned and organized method for disposing of a business's assets and paying off its obligations. This might give the business or its owners a fresh start while minimizing losses for creditors and investors. Yet, if the company is substantial or has a sizable market share, liquidation may cause severe losses for investors and employees in addition to having wider economic effects.
