Question

Q.Can you please explain what is liquidation and how it affects the different stakeholders, how does a company manage a good liquidating position? (500 words)

Answer 1

Liquidation can be defined as the the process by which a company is brought to an end under a statutory procedural requirement.Under this process the company which is running shuts down its operations and its existence comes to an end. The company no longer functions smoothly and is in the best interest to finally close its operations entirely. This often happens when the companies are unable to pay its creditors and hence need to sell off its assets to pay of them. Liquidation is defined as a situation where the shares of the company are considered worthless. The assets of the company are sold out in the market and are redistributed to pay off the debts or loans or creditors and other statutory payments due to the company. The process of liquidation differs from Country to country but the basic is first to pay workmen and statutory dues and than the creditors and lastly the shareholders. It depends on the legal process that the company undergoes under the country it is operating.

Under liquidation all the assets are essentially sold in exchange for the outstanding stock or shares as held by shareholders. The liquidation makes the shareholders lose their shares and ownership and they receive the left over cash (if any). The equity share holders are affected the most. When a public company goes into liquidation the shareholders are receive the assets only after everyone else is paid. If anything is left for payment after the outstanding debt holders and the investors and the statutory payments, the workmen, employees then only the number of receiving something to the shareholders comes. The preference shareholders have a preference over the common or ordinary shareholders. They receive payment first if anything is left for shareholders after payments to the outstanding debts and statutory requirements like the taxes. Common shareholders receive after the preference shareholders are paid. They are usually left with nothing to receive. Suppose, a company is not operating smoothly and its financial health is degrading; it becomes important for the company to shut its operations. It may go to the government itself to apply for liquidation or the government might itself take notice to shut its operation and start liquidation. In both the cases a liquidator is appointed. All the powers of the directors cease and are transferred to the liquidator who is responsible for smooth liquidating of the company.

A company can manage a good liquidating position by mainating a good financial health. There should be good financial operations, lesser debt and timely payment of available interest payments due on the outstanding debt instruments. The creditors should be kept in check and a lot of fund should not be blocked with the debtors or the account receivables. The sales and purchases must be done on aregular basis with no hampering and the company should not be in the list of defaulters anywhere. The consumer satisfaction for its product must be maximum and should contribute for making a solid goodwill.