Liquidation

Have questions about the definition and meaning of liquidation and the process of selling off assets for cash works?

Read our FAQs guide to learn why people and companies decide to liquidate their assets, including details about what liquid and illiquid assets are regarding cash, debts, creditors, bankruptcy, and much more!

What Is Liquidating Assets?

Liquidation is the process of converting assets, both tangible and intangible, into cash or the equivalent of cash by sale. The sell-off process also refers to winding up a business or enterprise and distributing the assets’ worth to claimants, either voluntarily or as a means to end a financial obligation.

Liquidating assets commonly occur when an individual, business, or entity wishes to raise cash quickly to serve a purpose. Some examples of assets that can be liquidated include:

• Real estate
• Stocks
• Bonds
• Equipment
• Machinery
• Inventory

Why Are Assets Liquidated?

People and businesses liquidate their assets to raise cash in a short amount of time. Specifically, some of the most common reasons why a person or company will liquidate assets include the following:

• Financial Distress: When an individual, business, or entity is unable to honor the financial commitment made to investors, creditors, or other claimants, corporate finance refers to this situation as being in financial distress. If unable to resolve, this ultimately ends in bankruptcy.
• Winding down a business: When a company ceases its operation, liquidating its assets and handing it over to all individuals involved are common.
• Rebalance and restructure an asset-holding: Liquidating assets can also occur when management wishes to restructure its current asset distribution and change each individual’s current holding.

What Are the Three Types of Liquidation?

There are three different types of liquidation of assets, which include the following:

• Voluntary Liquidation
• Compulsory Liquidation
• Creditors’ Voluntary Liquidation

Voluntary Liquidation and Members’ Winding Up (MVWU)

This happens when the company willingly sells its assets and distributes the wealth among stakeholders. A company may voluntarily sell off its assets in cases where it is solvent (able to meet promises of creditors/investors) or insolvent.

MVWU does not inherently mean a company is in financial trouble and unable to pay its debts.

Compulsory Liquidation

When a company fails to deliver its financial promises, is mismanaged, or is found to be involved in illegal activities, court-ordered liquidation can be carried out.

Typically, the court (or creditors, investors, or any regulatory authorities) will appoint a liquidator to take control of the company’s assets, who will then go ahead and sell them off and work out how to pay the parties who are owed the insolvent company’s debts.

After the liquidator finishes the sale of the assets and distribution of the proceeds to the creditors, the company will be formally dissolved and cease to exist.

Creditors’ Voluntary Liquidation

This form of voluntary liquidation is done by insolvent companies when they cannot meet their financial obligations and want to avoid lawsuits and court intervention.

The process involves a creditor bringing in a liquidator to manage the selling off of the company’s assets and then distributing the cash proceeds to the creditor.

How Does Liquidation Work?

The specific steps for how a liquidation works vary from one scenario to another. The following are some of the general steps that usually occur as part of an asset liquidation process:

• A liquidator is appointed who is put in charge of managing the process. Part of the liquidator’s job is to share reports with the required authorities and get approval for their plan during the process.
• The company’s assets are identified and evaluated.
• The liquidator will sell the assets to turn them into cash to be paid out.
• Once the final liquidation plan is approved, the proceeds will be distributed to the creditors and stakeholders (persons or entities with financial interest in the company).
• Only after all financial obligations are met will the legal entity(business) be dissolved.

Which Asset Has the Highest Liquidity?

Cash is always the asset with the highest liquidity since it can easily be converted into other types of assets. The term “cash is king” refers to cash assets’ having a high liquidity and investing power. Since it is already in the form of currency, cash is also a valuable asset through the lens of liquidation.

Other forms of liquid assets include Bank Deposits, Treasury Bills (T-Bills), Blue-Chip Stocks, etc.

When someone sells shares of a publicly traded company, they automatically get cash for however much they sold the shares for, which can be used for anything. That cash is liquid and can be deposited in a bank account or used to make new investments or purchases.

Can All Assets Be Liquidated?

Although, in theory, every type of asset can be liquidated, it is not practical to expect as not all assets can easily or quickly be liquidated for their fair market value.

Not all assets are considered liquid and can be difficult to sell for their fair market value or are incredibly time-consuming. These are known as illiquid assets. The following list includes some common examples of illiquid assets:

Illiquid Assets Examples:

• Intellectual property assets, such as patents, trademarks, or copyrights, are illiquid assets that are complex to sell due to their intangible nature.
• Real estate property riddled with debt or under legal dispute can be very illiquid.
• An asset subject to a lien can often not be liquidated until after the lien is satisfied. In many cases, selling an asset that is collateral will be fraud.

Who Is a Bankruptcy Trustee?

According to Chapter 7 of the United States Bankruptcy Code, the definition of a trustee is an agent appointed by the court to oversee the liquidation process. The debtor’s assets are liquidated in this manner in a bankruptcy case.

The trustee is a fiduciary (in law, a person who has the legal and ethical trust of parties concerning money and assets) and acts and must have the best interest of creditors in mind while overseeing operations.

Bankruptcy trustees can propose a plan and make recommendations for debtor demands. However, the bankruptcy court must approve the plan before the trustee takes these actions.

What Are the Negative Effects of Liquidation?

There are cons to liquidating assets. The negative effects of liquidation include:

• Loss of employment: Many people can lose their jobs when a company dissolves.
• Loss of assets: During liquidation, a business or entity can lose many of its assets, such as inventory, real estate, stocks, bonds, cash, etc.
• Loss for Creditors: Even after liquidation, creditors can face loss if the assets are unable to match the value of the financial obligation.
• Tax implications: There can be tax implications for the stakeholders during liquidation.
• Legal complication: Liquidation comes with legal expenses and administrative charges that can be hefty on the pocket. There can also be legal entanglements the stakeholders and business may get into if there are any discrepancies in the process.