liquidation

Liquidation is the process of ending a business and distributing its assets to satisfy its debts. It commonly results in the legal dissolution of the company. Liquidation can be voluntary, initiated by the company's owners, or involuntary, initiated by creditors or by a court order. In practice, liquidation entails realizing the company's assets and using the proceeds to repay creditors before the company ceases to exist.

Voluntary liquidation is divided into solvency-based and insolvency-based forms. In a solvent voluntary liquidation (often called a members’ voluntary liquidation), the company pays its debts in full and winds up. Insolvent voluntary liquidation (creditors’ voluntary liquidation) arises when the company cannot pay its debts and seeks formal oversight. Involuntary or compulsory liquidation is typically triggered by a court or by the actions of creditors and results in a liquidator being appointed to manage the process.

The liquidation process generally includes appointing a liquidator, identifying and realizing assets, and distributing the proceeds. Creditors are paid in priority: secured creditors receive proceeds from the assets securing their claims, followed by preferential creditors (such as certain employee entitlements and taxes), then unsecured creditors. Any remaining funds are distributed to shareholders, and the company is formally dissolved once the process is complete.

Liquidation is distinct from ongoing business operations, bankruptcy, or reorganization. It emphasizes asset disposal and creditor satisfaction rather than continuing operations. The term can also be used in finance to distinguish liquidation value (the net cash obtainable from selling assets) from the going-concern value of a business.

Different jurisdictions regulate liquidation with varying rules and terminology. In the United States, Chapter 7 bankruptcy is a form of liquidation; in the United Kingdom, creditors’ voluntary liquidation and members’ voluntary liquidation follow different procedures. Similar frameworks exist around the world, reflecting local insolvency laws.