Quick Summary
Liquidation is the formal process of closing a business, converting assets to cash, paying off debts, and distributing any remaining funds according to legal priority.
Liquidation is the process of bringing a business to an end and distributing its assets to claimants. It involves selling company assets, paying off creditors, and distributing any remaining funds to shareholders according to their rights and priority.
Types of Liquidation
| Type | Trigger | Control |
|---|---|---|
| Voluntary Liquidation | Shareholders decision | Company/Shareholders |
| Compulsory Liquidation | Court order | Court appointed liquidator |
| Creditors Voluntary | Insolvency | Creditors committee |
| Members Voluntary | Solvent winding up | Members/Shareholders |
Liquidation Process in India
- Board Resolution: Pass resolution for liquidation
- Shareholder Approval: Special resolution (75% majority)
- Appointment of Liquidator: Insolvency professional
- Public Notice: Notify creditors and public
- Asset Realization: Sell company assets
- Debt Settlement: Pay creditors in priority order
- Final Distribution: Distribute surplus to shareholders
- Dissolution: Company ceases to exist
Priority of Claims (Waterfall)
- Secured Creditors: With charge on specific assets
- Liquidation Costs: Liquidator fees, legal costs
- Employee Dues: Salaries, wages (up to limits)
- Unsecured Creditors: Trade creditors, suppliers
- Preference Shareholders: As per terms
- Equity Shareholders: Last in priority, first to lose
Liquidation vs Insolvency
| Aspect | Liquidation | Insolvency |
|---|---|---|
| Definition | Winding up a company | Inability to pay debts |
| Outcome | Company ceases to exist | May lead to resolution or liquidation |
| Process | Asset sale and distribution | Resolution plan or liquidation |
Liquidation Preference in Venture Capital
In startup financing, liquidation preference determines payout order:
- 1x Non-Participating: Investors get 1x investment back OR convert to common (whichever is better)
- 1x Participating: Investors get 1x back PLUS share remaining pro-rata
- Multiple: 2x, 3x etc. (investor gets multiple of investment first)
- Founders/common shareholders get what is left (often nothing in downside scenarios)
Key Points
- Winding up and distributing company assets
- Voluntary or compulsory types
- Creditors paid before shareholders
- Liquidation preference affects investor payouts
- Equity shareholders are last in priority
- Different from insolvency (which may be resolved)