What is liquidation?

Definition of liquidation

Liquidation is when a limited company, at the end of its life, sells off all its assets and pays off as many of its liabilities as it can with the proceeds.

A liquidation may be compulsory (instituted by unpaid creditors) or voluntary (instigated by the company’s shareholders).

A liquidator will be appointed to check that the company does actually own the assets which are about to be sold, in order to sell them, and to distribute the proceeds as appropriate.

When a company is liquidated, there is a legal order of priority for which debts have to be paid off first. For example, employees who are owed wages have priority over creditors. An exception would be if the creditors have a ‘fixed charge’ over any of the company’s assets - that is, if they are promised the proceeds from a particular asset in the event of a liquidation.