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What Is Liquidation?

Liquidation refers to a situation whereby a business is closed off, and its assets are sold to raise funds for the purpose of clearing the debts of the company.

It is the conversion of property or assets into cash or cash equivalents by sale on the open market. It could also be the process whereby a business is brought to an end, distributing its assets among legal claimants.

It is common for companies to massively liquidate their stock, especially if an overwhelming amount of debt was to be cleared before the business folded up.

Upon making payments to settle the business’ debts, any amount remaining is shared according to the shares held by each investor or stakeholder.

Liquidation could be either voluntary or involuntary/forced.

In the case of voluntary liquidation, the need to raise cash for new investments, purchases, or the closing out of old positions is the motivating factor. In contrast, forced liquidation is the case during bankruptcy procedures.

The sale of inventory at ridiculously steep discounts also qualifies as liquidation.

Deeper Definition

By liquidation, we mean that an investor’s position in an asset is closed because the company bearing the assets has become insolvent and cannot settle its debts and obligations.

Individuals and businesses may liquidate their assets due to the desire to get out of a weak investment or consolidate portfolio holdings.

A voluntary liquidation usually occurs when there is a unanimous decision among the company’s shareholders after a referendum where votes are used to decide for or against the proposed liquidation going ahead or not.

It could also occur if the majority shareholder leaves the establishment, and the other shareholders decide to follow suit.

In the case of compulsory liquidation, a court orders the dissolution of the company and its assets beginning with a petition being filed and following up with a ruling to that effect.

Liquidation Example

If a company becomes insolvent, either voluntarily or involuntarily, all its outstanding debts are written off; thus, it is an option to be considered instead of the entire investment being swallowed by debts.

All business assets are sold off to settle the debts leaving nothing to build from again should the owners decide to do so.

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