Liquidation

Liquidation, winding up of a company when it ceases business. There are two reasons to liquidate a company: one is its irretrievable insolvency or bankruptcy; the other is that its owners do not want it to continue (because it has done the job it was set up to do or for some other cause, such as the owners falling out with each other). Either the company's creditors or its owners may institute liquidation proceedings, which are governed by legislation.

The liquidator appointed to administer the liquidation has several responsibilities. A list of creditors has to be drawn up, and the company's assets have to be sold and the proceeds allocated among creditors according to clearly defined principles. Creditors have to prove (by producing supply notes and unpaid invoices, for example) that they are owed money, and fall into two types: secured and unsecured. Secured creditors are those who in return for providing the company with credit were given a charge on the company's property; the charge may be fixed (linked to a specific piece of property such as a building or a machine) or it may be floating (linked to the company's property in general). In principle secured creditors are paid before unsecured creditors, but some categories of unsecured creditor are paid first. These include the liquidator, the tax authorities, and the workforce; however, there are usually limits on how old the debts may be (only one year's unpaid taxes, for example). It is also important to remember that even preferential creditors often receive less than they are owed because the company's assets when liquidated do not raise enough to pay them in full.