Liquidation

Liquidation, also called winding up, can happen for different reasons. In a compulsory liquidation, a court orders the company to be wound up, usually at the request of creditors who are owed money. In a voluntary liquidation, the company's shareholders decide to close it, either because it is insolvent or because the owners simply want to end the business. A solvent company can be wound up in a members' voluntary liquidation, with all debts paid and remaining money returned to shareholders.

A liquidator, usually a licensed insolvency professional, takes control of the company, sells its assets and distributes the money according to a legal order of priority. Secured creditors and certain preferential creditors, such as some employee claims, are generally paid first, followed by unsecured creditors. Shareholders receive money only if everything else has been paid in full, which in insolvent liquidations rarely happens.

For example, a retailer that collapses might be liquidated, with its stock, property and equipment sold and the proceeds shared among lenders, suppliers and employees.

The term liquidation is also used in investing to mean selling assets to convert them into cash, such as liquidating a portfolio.