Question

There are two basic options in the situation of financial distress: liquidation or reorganization. Explain them (200 words)

Answer 1

Liquidation basically means closing down the business activities of a company. It may also show winding up of a company. A company is wound up by disposing the assets of a company and the money which is realised from sale of assets is used for the payment towards creditors first and the balance left is utilised to pay the members of the company. A company decides for liquidation on its own because of total failure of operation of company. The failure of business may be caused due to insolvency of a company, continuous losses or other such reasons.

Reorganization means significant and disruptive overhaul of a troubled business in order to restore it to profitability. It may include shutting down or selling divisions, replacing management, cutting budgets, and laying off workers. Reorganization includes a change in the structure or ownership of a company through a merger, transfer spinoff, acquisition, recapitalization or a change in management. The management of the unprofitable company can impose a drastic series of budget cuts, management layoff, staff layoffs and product line changes for restoring the health of the company. The company is not in bankruptcy and is hoping to change the course and turn profitable.