1. The process of finalizing a company’s operations and distributing its assets to those who have claim to them. This process typically occurs when a corporation becomes insolvent (i.e., a business is unable to pay its creditors and otherwise resolve financial obligations once they become due).
The liquidation process is governed by Chapter 7 of the U.S. Bankruptcy Code, but not all corporate bankruptcies necessarily involve liquidation proceedings. An alternative to liquidation bankruptcy is Chapter 11 rehabilitation bankruptcy, which may be of interest to companies currently struggling to meet their business obligations. Whereas Chapter 7 bankruptcy results in the end of a company’s operations, Chapter 11 bankruptcy results in debt restructuring designed to rehabilitate a company’s finances.” If Chapter 7 bankruptcy is admitting defeat after a hard-fought financial battle, Chapter 11 bankruptcy is living to fight another day.
During liquidation proceedings, debts and other claims on a company’s assets are paid out according to priority. In order to ensure that assets are paid out properly, the U.S. Department of Justice appoints a trustee to oversee the distribution process. Generally speaking, secured creditors are paid out first, followed by unsecured creditors. Once these claims are paid, shareholders are entitled to any remaining assets – first preferred stockholders are paid and then common stockholders.
2. The process of selling off a specific kind of inventory until it has been completely bought out, usually at significant discounts. When a company is going out of business, it usually liquidates the whole of its remaining inventory.
Accountant: “I know that the situation seems dire, but I think that we might qualify for Chapter 11 bankruptcy. I don’t think the company necessarily needs to liquidate at this point.”
Executive: “I don’t understand.”
Accountant: “With some financial rehabilitation, I think we can keep the company operational.”
Executive: “But why are you considering turning the company into water? Is that a financial term? How does that even work?”
Accountant: “Sir, I said ‘liquidate’ not ‘liquify.’”
Executive: “Oh. Sure. Of course. Silly of me. Wait… how is that different?”