Liquidation is the ability of a company to meet its obligations to pay short-term debts when they are due. Liquidation generally refers to the process of selling inventory from a company, and usually at a large discount aimed at earning cash.
 
In most cases, a liquidation sale is the beginning of the closure of a company's business. In the world of accounting itself, liquidation refers to the process of selling all assets in the company to get cash, which the company will use as a tool to pay off creditors or to whoever the company owes. 
 
If your company has high liabilities, then it is said that the performance of your company is quite good, but if the ability to meet your company's liabilities is low, then it is certain that your company's performance is not good.
 
When a company has a high level of liquidity, then the company has a greater possibility of asking for support from other companies. 
likuidasi adalah
Definition of Liquidation 

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As mentioned above regarding assets, there are various types of assets that can be liquidated by the company such as store equipment, decorations, machinery, office tools, office vehicles, and wall decorations can also be used as assets in liquidation. 
 
The level of liquidity is described using numbers. The number found in liquidity is usually to describe commonly used ratios such as quick, current and cash ratios. Financial institutions prefer to choose companies with high liquidity levels to "keep" their funds, so that the liquidity owned by companies is considered to have an important role in showing their performance and also being a target for investors. 

Liquidation sales are usually part of the bankruptcy filing experienced by a company, but it is not always like that. A business can liquidate most or all of its investors as part of a move to a new location, this aims to save money because the company has to move everything to a new location.

The disadvantage of investor liquidation is the short liquidation schedule of its assets where the discount is low and the cash obtained is also much lower compared to the retail price.

Liquidation Process

Below are the standards in the liquidation process: 
  1. Directors who will decide to liquidate the business voluntarily due to inadequate cash flow
  2. Dissolution is the only way to pay off debts from creditors. Alternatively, the court will order the compulsory dissolution of the business
  3. The company or court appoints an expert or professional as a liquidator to handle the liquidation process. At this stage, the owner of the company will lose his rights, then the liquidator takes over, the liquidation professional then dissolves the assets after valuing the
  4. The next step is, the liquidator has the authority to distribute the funds among the claimants based on the order of basis and priority, then the company is removed from the list of companies

Claim Priority

The main order of settlement of claims in the liquidation process is as follows:
  •  
  • Secured: the first order is that the company settles its preferential creditors like employees with the owner of the company by replacing all secured creditors and paying the hired liquidator for the liquidation process
  • Unsecured: After the secured process, then come suppliers, contractors, and debt letter holders.
  • Stakeholders: the final stage is the stakeholder where the remaining funds are distributed between shareholders and investors and company owners

Types of Liquidation Ratios

Quick Ratio

This type of ratio in liquidation is a type of ratio that is commonly used to see the ability of the company to pay off each debt quickly with a ratio of current assets to short-term debt. 
 
There are several things that must be considered when formulating this ratio. This ratio calculates starting from short-term loans, income debt, accounts payable to credit debt. In addition, in current assets that you must calculate correctly are money, receivables to liquidated investments. Investments in this ratio do not need to be included in the asset class, because it is considered difficult for the company to turn it into cash. 

Net Profit Margin

The next liquidity comparison is the net profit margin. The net profit margin is the percentage of the remaining income after you deduct costs from interest, taxes and production. The average investor judges a company by its net profit ratio, because the net profit margin can describe the company's ability to convert residual to benefits and also manage finances. 

Cash Ratio

In this comparison, what is compared is the bill with cash flow then the result is what must be paid by the company. If the turnover on the company's cash is low, then this can derail the company's small business. If the amount of the ratio to the company's cash is reduced by just one, it means that the company is unable to pay its debt obligations. 

The types of Liquidation are as follows : 

Compulsory Liquidation

In this liquidation, creditors will usually file an appeal to dissolve the company. Creditors will no longer trust the company.

Voluntary Liquidation of Members

When the company is able to pay off its obligations, then in this case the dissolution of the company occurs due to approval. Sometimes the purpose behind the formation of a company is fulfilled, and the owner wants to dissolve. In an alternative way, the business owner in this case can be relocated or the company can undergo a restructuring. 

Voluntary Liquidation of Creditors

In this case, the company goes bankrupt so the director or owner of the company initiates this liquidation to avoid court intervention until the act of forced dissolution. In short, the company declares bankruptcy before the creditors take legal action. 

Liquidation Example

  • Mark
A popular retail and leisure brand from the UAE has been declared out of business by a court in Dubai. The court then ordered liquidation. Along with the notification, the related company that went out of business was sent to the subsidiary. Then the bankruptcy guardian who has been appointed by the court asks the board of directors to hand over all assets, documents and funds.
 
The court also ordered the board of directors to pay around 448 million dirhams to creditors. Then the sanctions were imposed because the directors were responsible for the company's management errors and for not providing financial information accurately. 
 
What does a liquidator do?
Liquidators are authorized by the court, the company, or unsecured creditors to proceed with the liquidation process of the company in question. Such a person is responsible for raising money by selling business assets.
 
What happens when a company goes into liquidation?
Liquidation means that the business entity no longer exists. As a result, assets and liabilities were abolished. On the one hand, the assets are released, and on the other hand, the liabilities are settled.
 
What is forced liquidation?
A forced dissolution occurs when the business owner or director does not intend to close the company. However, due to bankruptcy or other legal action, the court may order the closure of the business. The assets are then sold to pay off the liabilities. After paying off all the plaintiffs, any remaining funds are distributed to the owners, shareholders, and investors.

The benefits of liquidation are as follows: 

Understanding the advantages of liquidation is essential to ensure you're making the right decision for your company at the moment that matters most. This helpful guide will tell you all about the main advantages of liquidation. However, first, we will look at the different types of liquidation.
  • Minimizing debt payments
Among the biggest advantages of liquidation is the fact that most of your debt will be written off (except under certain circumstances). You still have to bear the cost of your company's Statement of Affairs and creditors' meeting.
 
However, all subsequent liquidation costs (including the repayment of debts/creditors' receivables) will be met through the sale of the company's assets. This generally makes liquidation a cost-effective option.
 
Any redundancy or restructuring costs will be managed by your bankruptcy practitioner. They will be responsible for staff redundancies and related payments, as well as cancelling leases or other long-term obligations.
 
Unless you have provided a personal guarantee or have withdrawn a director's loan, this debt does not need to be settled by you or your shareholders.
  • Ending legal action
Entering into liquidation allows you to end the prospect of legal action and focus your efforts elsewhere.
 
Unless you have personal liability for the company's debts, your creditors will not be able to initiate court proceedings against you.
 
Therefore, you can show that your company was closed due to voluntary action, not because it was forced to close because a disgruntled creditor petitioned you through the court.
  • Cancel a rental arrangement
Not only will you minimize the debt payments you've accumulated to date, you can also prevent further payments in the future.
 
Usually, any lease or hire-purchase agreement will be terminated when you liquidate your company. This means that you are no longer responsible for any subsequent payments that may have been part of your initial setup.
 
If you owe arrears to the leasing company's creditors, they may be able to claim this amount back from the bankruptcy partner you appointed.
 
The above is a discussion about liquidation. Keep updating other latest information through the GIC journal which will be announced every day. You can also trade on the GICTrade app with its latest feature, the ECN account, enjoy the advantages of the latest features with the lowest spreads starting from 0!