The secured creditors would take over the assets that were pledged as collateral before the loan was approved.
The unsecured creditors would be paid off with the cash from liquidation, and if any funds are left after settling all creditors, the shareholders will be paid according to the proportion of shares each holds with the insolvent company.
While businesses can liquidate assets to free up cash even in the absence of financial hardship, asset liquidation in the business world is mostly done as part of a bankruptcy procedure.
When a company fails to repay its creditors due to financial hardship and prolonged losses in its operations, a bankruptcy court may order a compulsory liquidation of the business assets if the company is found to be insolvent.
If that does not cover the debt, they will recoup the balance from the company’s remaining liquid assets, if any. These include bondholders, the government (if it is owed taxes) and employees (if they are owed unpaid wages or other obligations).
Liquidation can also refer to the process of selling off inventory, usually at steep discounts.
The company’s operations are brought to an end, and its assets are divvied up among creditors and shareholders, according to the priority of their claims. Not all bankruptcies involve liquidation; Chapter 11, for example, involves rehabilitating the bankrupt entity and restructuring its debts.
Liquidation is the process of bringing a business to an end and distributing its assets to claimants.
Any cash that remains is then distributed to preferred shareholders, if any, before common shareholders get a cut.
In finance and economics, liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. Bankruptcy Code governs liquidation proceedings; solvent companies can also file for Chapter 7, but this is uncommon.
As said earlier, not all liquidation is as a result of insolvency.