Liquidation meaning in business

Wondering what “liquidation” means in business? The term generally refers to the large-scale sale of company assets to repay creditors before shutting the business down.

But there’s a wee bit more to it than that. In this post, we’ll cover a comprehensive definition, common liquidation reasons, and the process in New Zealand.

What does liquidation mean in business?

When a business goes into liquidation, its assets are sold to free up “liquid” cash, which is used to repay debts owed to creditors.

The typical Kiwi business owes money to various parties, including suppliers, landlords, utility companies, employees/subcontractors, the Inland Revenue Department (IRD), and shareholders. Any such parties owed money are known as creditors.

Liquidation can also mean selling assets to free up cash for other reasons. For example, a Queenstown snowboarding shop might run a liquidation sale to clear last year’s stock and reinvest in this season’s gear. This post will dive deep on liquidation as an exit strategy.

Why do businesses go into liquidation?

The most common reason for liquidation is insolvency, when a company can no longer meet its financial obligations. When a business stops earning sufficient income to cover staff, rent, utilities, or other debts, it becomes insolvent.

So what causes insolvency? Many factors can cause a Kiwi company to go under. Commonly cited reasons include economic downturns, cash flow complications, and accumulating debt.

But insolvency isn’t the only reason to choose liquidation as an exit strategy. Some owners liquidate because their offspring don’t want to continue the family business. Instead of selling the company to a new owner, the entrepreneur opts to liquidate and cash out.

Others simply find liquidation faster and less stressful than selling. Many entrepreneurs prefer to purchase inventory and start their own business rather than buy an existing one, especially when its finances aren’t in great shape.

Liquidation vs. Bankruptcy vs. Dissolution: What’s the difference?

Liquidation, as we know, is when a business sells its assets to free up cash, often to pay creditors before closing down.

While the term “dissolution” is popular abroad, it’s not commonly used by the New Zealand Companies Office. Dissolution is the formal, legal process of closing a business, which may occur with or without liquidation. To dissolve a business in New Zealand, the company must have:

• Stopped operating
• Distributed its assets (with or without liquidation)
• Paid all of its debts
• No creditors taking legal action to put it into liquidation¹

Depending on the company constitution, it’s up to the shareholders and/or directors to remove the business from the Companies Register.¹

When a Kiwi company is liquidated, the liquidator must apply to have it removed from the Companies Register, thereby enabling its dissolution.²

Bankruptcy is the insolvency of an individual rather than a company. It can apply to sole traders, as the business forms part of their personal finances and they’re liable for all losses.³

You become bankrupt in New Zealand once you have an unsecured debt of over $50,000 and are unable to repay your creditors.⁴

Insolvency will relieve you of most debts, but it comes at a cost. Bankruptcy can have a substantial negative impact on your life–your financial situation goes on a public register, making it harder to get a job, borrow money, or open a bank account.⁴

What happens during the liquidation process

When a company goes into liquidation in New Zealand, a liquidator will be appointed by a court order or by creditors during a watershed meeting. The liquidator, who must be a licensed insolvency practitioner,² will:

• Research the insolvent company’s financial affairs
• Determine what caused it to fail
• Investigate potential criminal offences caused by the company or directors²

The liquidator will freeze unsecured assets and develop strategies to sell them for the best possible price, using the proceeds to repay creditors. Selling assets often isn’t enough to cover all debts, meaning some creditors may receive partial repayments or no money at all.

Liquidators work closely with creditors, often holding meetings to identify assets, gather detailed company information, and discuss relevant issues.

Liquidators receive special powers to contact and liaise with shareholders, employees, accountants, solicitors, directors, and other relevant parties.²

Repaying creditors

An independent assessor helps determine which creditors get repaid, and how much. Generally, the order of priority is as follows:

• Secured creditors with guaranteed loans (i.e., property)
• Liquidation administrative costs
• Employees owed wages, including benefits
• Government taxes and fines
• Unsecured creditors (suppliers, credit card companies, loans without collateral)

Shareholders and directors receive payments only after all other creditors have been paid in full.

Types of assets

When gutting a business, liquidators consider different strategies to convert three main asset types into cash.

• Assets indirectly producing income: Furniture, fixtures, and equipment (FFE), such as lighting and computers in a shopfront or office. These aren’t worth much as they’re often sold well below cost to second-hand dealers and auction houses.
• Tools used to directly produce income: Kitchen appliances, warehouse machinery, and tech. These assets are commonly sold in bulk at a hefty discount to competing businesses, second-hand dealers, or auction houses.
• Assets sold to directly produce income: Retail stock, such as apparel, electronics, furniture, and sporting goods. Many retailers hold a liquidation clearance to relinquish their inventory before closing down.

Finalising a liquidation

In many countries, directors undertake a dissolution process after liquidation to formally close their company down.

In New Zealand, the liquidator submits reports to the Companies Register and then provides a public notice of the intention to deregister the company, which effectively serves as a dissolution. The Companies Register will wait 20 days from the date of that notice before dissolving the company.²

A company in New Zealand isn’t required to submit any annual returns once it’s gone into liquidation.²

Example of liquidation process in New Zealand

Here’s a brief rundown of the liquidation process for a fictional Kiwi cafe.

Choice Bean Cafe in Christchurch has had severe cash flow issues due to rising living costs. After failing to negotiate with creditors, the owner realises his business has become insolvent and appoints a liquidator.

The liquidator closes the cafe and takes control of its assets, selling off furniture, fixtures, kitchen equipment, and non-perishable stock to auction houses and other Christchurch cafes.

With the help of an independent assessor, the liquidator uses that cash to repay debts in a pre-determined order of priority: secured creditors, employees, the IRD, and unsecured creditors. Some lower-priority creditors only receive partial payments and must write off the remaining debt.

After submitting a detailed report, the liquidator files a public notice of the intention to remove the company from the Companies Register, which is finalised after 20 working days.

Streamlining liquidation with Wise Business

International transfers often form part of the liquidation process, especially for Kiwi companies with assets spread across the globe. But some banks may delay finalising overseas payments and slug already-insolvent companies with hefty FOREX fees.

When it comes time to sell up and cash out, Wise Business offers a faster, simpler, and more cost-effective way to move money across borders.

A Wise Business account allows users to can send, receive, and hold in multiple currencies. Experience hassle-free global transactions by transacting like a local business. Here's what you get with a Wise Business account:

• Free to register — Hold and convert between 40+ currencies. Send to 140+ countries
• Debit cards for you and your team, which you can use in 150+ countries
• Multi-user access for team members, with ways to control and manage permissions
• Pay up to 1,000 recipients at once with the Wise batch payments feature
• Integrate with your favourite cloud accounting solutions like Xero, QuickBooks, and more
• Get account details to receive in 8+ currencies for a one-time fee of 40 NZD

Sign up for the Wise Business account! 🚀

This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

FAQs:

1. What happens if your company goes into liquidation?
Your company goes into liquidation when it can’t pay its debts. The business stops trading, and a liquidator sells off as many assets as possible to repay creditors. Funds are redistributed in a predetermined order: secured creditors, employees, the IRD, and unsecured creditors. Finally, the liquidator provides a notice to remove the company from the Companies Register, which takes 20 working days to process.

2. Does liquidation mean closing down?
When a company goes into liquidation, it usually means it will close down permanently. Assets are sold to repay creditors, and the business is removed from the Company Register, ceasing to exist as a legal entity.

Sources:

1. Before you close a business
2. What happens during liquidation
3. Choose a business structure
4. Bankruptcy and Insolvency