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What Are the Different Reasons for Liquidation?

Filing for bankruptcy can lead to a liquidation of assets.
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  • Written By: K. Kinsella
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 30 July 2014
  • Copyright Protected:
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    Conjecture Corporation
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Liquidation occurs when a company or organization closes down, its assets are sold, and proceeds from the sale are distributed to creditors and other individuals or entities with claims on the company. Some liquidations are compulsory, in which case the process occurs as the result of a court order. Other liquidations are voluntary, in which case the people running the organization decide to cease operations. Among the most common reasons for liquidation are bankruptcy, legal problems, or a lack of desire among the people running the entity to keep it operating.

Rules on court ordered liquidations vary around the world, but these proceedings typically can be initiated by the company itself, the shareholders, or its creditors. The party wishing to initiate the process must make a court filing explaining the reason for the liquidation and if the judge approves the request, the firm must cease operations and administrators are normally appointed by the court to oversee the sale of its assets. Court ordered liquidations often happen when people in control of a firm fail to issue stock certificates to shareholders or as a result of a company failing to pay its creditors. The court appointed administrator reviews claims made on the entity's assets and settles claims based on seniority of claims, which usually means creditors are paid ahead of shareholders.

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Corporate bankruptcies normally result in liquidations, but laws in many places also require firms that are insolvent but not yet bankrupt to liquidate. Firms are technically insolvent when they lack sufficient income to cover debt obligations. Insurance companies and other financial companies are often subject to compulsory liquidation when insolvent.

Some long established companies are liquidated when changes in the law mean that the business can no longer continue to operate. Firms engaged in activities that are outlawed must cease operations and liquidate in order to avoid prosecution for engaging in unlawful activities. Other companies stop operations and liquidate as a result of changes in the law that make a particular business model obsolete. This often occurs when laws relating to imports, exports, and information sharing change, and companies that were in the business of providing technology to uphold previous in-force laws no longer have a reason to exist.

Voluntary liquidations sometimes occur because shareholders of a failing firm close down a business before it goes bankrupt, but in other situations shareholders or company owners willingly liquidate a firm. If a business was created to provide services for a particular event, the owners of the business usually liquidate it after the event it was created for finishes. In other situations, business owners who wish to retire but cannot find suitable buyers for a firm decide to liquidate the company to raise funds for retirement.

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