A:

Liquidation is the process where a firm's assets and liabilities are terminated, realized and subsequently distributed. In many cases, the firm ceases to exist. The liquidation process is sometimes voluntarily initiated by members of the firm. Other times it is compelled by a creditor's petition to the courts for failure to uphold contractual payments.

Voluntary Liquidation

Voluntary liquidation actually falls into two subcategories: those with a declaration of solvency and those without. An otherwise solvent company might determine that, through liquidation, it is able to pay its debts within a specified period. Its directors can then issue a formal declaration of solvency and its shareholders can lead the appointment of a liquidator. This is sometimes called a '"members' voluntary liquidation." Shareholders may elect to initiate a liquidation without the directors having issued a declaration. In these cases, the liquidator is appointed by the company's unsecured creditors, not the shareholders.

Compulsory Liquidation

If a delinquent company does not voluntarily wind down, its creditors can present a petition to a court to force liquidation. These petitions may also be presented by the company, its directors or others affected by its balance sheet, although these cases are more rare. Most often, an unsecured creditor initiates a compulsory liquidation process. The court then determines if assets should be sold off to repay creditors.

Compulsory business liquidation is different than "forced liquidation" by a brokerage house. A forced liquidation involves a delinquent customer whose positions are involuntarily closed to reduce exposure and meet legal margin requirements.

RELATED FAQS
  1. What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity ... Read Answer >>
  2. How much liquidity is considered too much liquidity?

    Learn about the risks of holding too much cash or investing in assets that are too liquid, and discover how liquidity is ... Read Answer >>
  3. Is it important for a company always to have a high liquidity ratio?

    Understand the significance of the liquidity ratio and how it is used in conjunction with other measures to arrive at an ... Read Answer >>
Related Articles
  1. Investing

    Understanding Financial Liquidity

    Financial liquidity comes into play for companies, your personal finances, investing, and the financial markets. However, assets and investments have varying liquidity levels.
  2. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  3. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  4. Investing

    Working Capital Position

    Learn how to determine a company's working capital position to correctly analyze liquidity.
  5. Investing

    Why Scarce Liquidity Will Burn Stock Investors

    Most U.S. stocks have very thin trading volumes, meaning huge price drops if a surge of selling erupts.
  6. Tech

    Bitcoin Liquidity: What The Stakes Are

    Liquid markets are easy to exit; illiquid markets can put traders in a tough spot. Here are the main factors affecting the liquidity of Bitcoins.
  7. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  8. Investing

    Vanguard's Liquidity ETF Tries to Isolate Stocks That Trade Less

    Vanguard's U.S. Liquidity Factor ETF isn't looking for illiquid stocks, just ones that aren't traded as much as others.
RELATED TERMS
  1. Winding Up

    Winding up is the process of liquidating assets, paying creditors, ...
  2. Liquid Asset

    A liquid asset is an asset that can be converted into cash quickly ...
  3. Liquid Market

    A liquid market is one where there are many bids and offers and ...
  4. Broad Liquidity

    Broad liquidity is a category of the money supply which includes: ...
  5. Flight To Liquidity

    A situation where investors attempt to liquidate positions in ...
  6. Overall Liquidity Ratio

    Overall liquidity ratio is the measurement of a company’s capacity ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center