Liquidation strategies refer to the various plans or methods used to close a business, sell off its assets, or convert those assets into cash. These strategies are typically employed when a company decides to cease operations, dissolve, or when it enters bankruptcy.
The process for liquidating a company typically involves several steps and may vary depending on the jurisdiction and specific circumstances of the business. Here is a general outline of the steps that may be involved:
- Decision to Liquidate: The first step in the liquidation process is the decision to liquidate. This might be a voluntary decision made by the company’s owners, or creditors, or a court order could force it.
- Appointment of a Liquidator: A liquidator is appointed to oversee the process. In voluntary liquidation, the shareholders usually appoint the liquidator, while in compulsory liquidation, the court appoints one. The liquidator can be an independent third party or a specialized firm.
- Assessment of Assets and Liabilities: The liquidator assesses the company’s assets and liabilities. This includes everything the company owns (like real estate, inventory, and cash) and owes (like loans, wages, and taxes).
- Notification of Creditors and Shareholders: The liquidator must notify all creditors and shareholders about the liquidation. This is usually done in writing, and there may be legal requirements for public notifications, such as newspaper ads or official gazette notifications.
- Sale of Assets: The liquidator sells off the company’s assets. This could be done through auctions, private sales, or sales to existing stakeholders. The goal is to get the highest possible price to pay off as much debt as possible.
- Settlement of Claims: The proceeds from the sale of assets are used to pay off the company’s debts. Usually, secured creditors (those with a legal claim to specific assets, like a mortgage lender) are paid first, followed by unsecured creditors. If there are any remaining funds, they are distributed among the shareholders.
- Dissolution of the Company: Once all the assets have been sold and the proceeds distributed, the company is formally dissolved. This involves filing documents with the relevant government agency to remove the company from the register of companies.
- Final Report: The liquidator will often prepare a final report outlining how the liquidation was carried out, how assets were sold, how the proceeds were distributed, and the final outcome of the liquidation process.
It’s important to note that liquidation is a complex process and often requires legal and financial expertise. Companies going through this process usually hire professionals to guide them and ensure they comply with all legal requirements.
Types of Liquidation Strategies
A business may use several types of liquidation strategies depending on its circumstances. The following are some of the most common:
- Orderly Liquidation: This involves a strategic and gradual process of selling off assets. The intent is to avoid a sudden flood of assets into the market, which could depress prices and lead to lower recovery. It is often used when the business is not in immediate financial distress but has decided to cease operations.
- Forced Liquidation: This strategy is often used when the business is in severe financial distress or insolvent, and assets must be sold quickly to pay off creditors. Assets are usually sold as quickly as possible, often for less than their full value.
- Voluntary Liquidation: This is when the company’s owners decide to cease operations and liquidate assets. This is usually because the business is no longer viable but not necessarily insolvent. The assets are sold, and the proceeds are used to pay off creditors. Any remaining proceeds are then distributed to shareholders.
- Compulsory Liquidation: This is initiated by creditors and involves a court process. It happens when a company cannot pay its debts, and the creditors petition the court to force it into liquidation. The court appoints a liquidator who sells the assets and distributes the proceeds to creditors.
- Members’ Voluntary Liquidation (MVL): This is a formal insolvency process initiated by the shareholders of a solvent company. The company’s directors declare solvency stating that it can pay its debts in full within a specified period, usually 12 months. The company’s assets are liquidated, and the proceeds are distributed to creditors and shareholders.
- Creditors’ Voluntary Liquidation (CVL): This process is initiated by the directors of an insolvent company. The assets are liquidated, and the proceeds are distributed to creditors. A CVL can be a way to prevent compulsory liquidation and provide a better outcome for creditors.
Each type of liquidation strategy has different impacts on the company, its creditors, and shareholders, and each involves a different level of control by the company’s management. The right choice depends on the specific circumstances of the business.
Examples of Liquidation Strategies
Below are a few examples of how different types of liquidation strategies might be used in specific circumstances:
- Orderly Liquidation: A manufacturing company facing declining sales over several years decides to cease operations. Instead of abruptly shutting down and selling off all assets at once, the company takes a planned approach, gradually selling machinery, real estate, and inventory to maximize the return from the sales.
- Forced Liquidation: A restaurant chain facing immediate insolvency due to an economic downturn might be forced into a quick liquidation. To satisfy its urgent financial obligations, this could involve an auction or rapid sale of assets, including kitchen equipment, furniture, and leasehold improvements.
- Voluntary Liquidation: After struggling to find a profitable business model, a tech startup decides to liquidate voluntarily. They proceed to sell their intellectual property, server equipment, and office supplies and use the proceeds to pay off their creditors.
- Compulsory Liquidation: A construction company defaults on its large debts and is unable to pay its creditors. One of its largest creditors petitions the court to liquidate the company. The court orders the liquidation and appoints a liquidator, who then sells off the company’s assets, including construction equipment, vehicles, and any property they may own.
- Members’ Voluntary Liquidation (MVL): The shareholders of a profitable consulting firm decide they want to retire, and there’s no succession plan in place. They opt for a Members’ Voluntary Liquidation, liquidating the company’s assets (including office space, furniture, and cash reserves), paying off any debts, and distributing the remaining assets among the shareholders.
- Creditors’ Voluntary Liquidation (CVL): An online retail store has suffered from decreased sales due to stiff competition. It can’t meet its financial obligations, and the directors decide to put the company into a Creditors’ Voluntary Liquidation. Assets such as inventory, domain name, and warehouse equipment are sold off, and the proceeds are used to pay the creditors.
Each of these examples shows how different liquidation strategies can be employed depending on the circumstances of the business.
Case Study of Liquidation Strategy
A well-known case study involving a liquidation strategy is that of the American retailer, Toys “R” Us.
Toys “R” Us was once a leading toy and juvenile-products retailer, with over 800 stores in the United States and many international locations. However, the company faced major challenges with the rise of e-commerce giants such as Amazon and big-box retailers like Walmart and Target.
In the face of declining sales and increasing debt, Toys “R” Us filed for Chapter 11 bankruptcy protection in the United States in September 2017. This was an attempt to restructure its debt and operations, but it proved unsuccessful.
In March 2018, Toys “R” Us announced that it would sell or close all of its U.S. stores, marking the start of its liquidation process. This kind of forced liquidation was driven by the company’s inability to sustain its operations or restructure its debt.
The company hired liquidators to sell its inventory, store fixtures, and other physical assets. It conducted going-out-of-business sales at its stores, selling merchandise at deep discounts. Its brand name and other intellectual property assets were also sold off.
The proceeds from the liquidation were used to pay off the company’s creditors, which included suppliers, lenders, and landlords. However, Toys “R” Us’s liquidation process was complex and lengthy, given the size of the company and the number of its creditors.
This case demonstrates how liquidation can be a last-resort strategy for businesses facing insurmountable financial difficulties. However, it’s also important to note that liquidation often doesn’t fully compensate creditors and can result in job losses and other economic and social impacts.
