What is Liquidation?
Liquidation is the process of winding up a company’s affairs and distributing its assets to the creditors and shareholders. It occurs when a business is unable to pay off its debts and must be dissolved.
Types of Liquidation
- Voluntary Liquidation: This occurs when shareholders or directors decide to liquidate a company due to financial distress or other reasons.
- Compulsory Liquidation: This is initiated by creditors or stakeholders through a court order when a company is insolvent.
Steps in Liquidation
- Appointment of Liquidator: A liquidator is appointed to oversee the liquidation process and distribute assets.
- Realization of Assets: The assets of the company are liquidated, and the proceeds are used to pay off creditors.
- Settlement of Debts: Creditors are paid off in a specific order of priority according to the law.
- Distribution of Remaining Assets: After settling debts, the remaining assets are distributed to shareholders.
Case Studies
One famous case of liquidation is the bankruptcy of Lehman Brothers in 2008 during the financial crisis. The investment bank filed for Chapter 11 bankruptcy, leading to the liquidation of its assets to repay creditors.
Statistics on Liquidation
According to a study by Harvard Business School, around 70% of businesses end up liquidating within the first 10 years of operations. This highlights the importance of financial management and planning to avoid liquidation.
