Liquidation is the bankruptcy process in which a liquidator assembles and sells a debtor’s assets and distributes the sale proceeds to creditors in accordance with the priority rules of established law.  Liquidation ends in dissolution, where the debtor is a corporation or other legal entity, or discharge, where the debtor is an individual.  Operating on the asset side of the debtor’s balance sheet, a liquidation occurs by means of a piecemeal sale of the debtor’s assets or a bulk sale of all or most of the debtor’s assets in productive operating units or as a going concern:

  • Bulk liquidation – The sale of most or all of a firm or selected business lines with a view to preserving going-concern value.
  • Piecemeal liquidation – The asset-by-asset liquidation of a firm without regard to its going-concern value, which generally yields creditors a higher return where an insolvent firm has little going-concern value.
Factors for Discounting Distressed Assets in Liquidation
   1.   The urgency and speed with which the assets are liquidated.
   2.   Asset characteristics.
   3.   Number of potential buyers.
   4.   State of the economy.
   5.   Liquidation method.

The main purpose of a liquidation where the company is insolvent is to collect in the company’s assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law.  The priority of claims on the assets of a company in liquidation is commonly determined in the following order:

  1. The costs of the liquidation;
  2. The preferential creditors by operation of law;
  3. The claims of the holders of a floating lien;
  4. The unsecured creditors are paid pari passu in accordance with their claims; and
  5. Surplus assets are distributed between members according to their respective entitlement.
The Hierarchy of Creditors in Winding Up UK Firms
   1.   Assets subject to fixed liens and in which title has been retained.
   2.   The costs of the liquidation.
   3.   Preferential creditors by operation of law.
   4.   The claims of holders of floating liens.
   5.   The unsecured creditors paid pari passu in accordance with their claims.
   6.   Any surplus assets to members in accordance with their entitlements.

Generally, the claims of such creditors as employees, trade creditors and tax authorities would have priority by operation of law, without regard to the outcome of workouts or formal parity between their claims and those of the financial creditors, by the application of the established legal rules and existing legal principles to the particular transaction.

Break-Up Value Calculation
      Estimated Proceeds from Sale of Assets
−    Liquidation Costs
+    Cash
−    Funded Debt
−    Current Assets                   
=    Break-Up Value of Firm

The last phase of a liquidation is dissolution, which is the process by which the whole or part of a company’s affairs is wound-up and its assets redistributed.  After having wound-up the company’s affairs, the liquidator must call a final meeting of the members, creditors, or both, and then send final accounts to the registrar of companies and notify the court.  A company that has been liquidated is dissolved and ceases to legally exist.

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