What Is Complete Liquidation?

"Complete liquidation" is a term that is used to describe the process of relinquishing control and ownership of assets to shareholders, allowing those shareholders to then make decisions about how to dispose of those assets. This type of activity occurs when a business is choosing to shut down permanently and must settle obligations to both shareholders and other debtors. As part of the arrangement, the shareholders assume the responsibility for honoring any outstanding debts to vendors and others, then distributing the remaining assets among themselves or selling off those assets and distributing the cash from the sales according to some type of agreed-upon allocation schedule.

A business begins the process of complete liquidation by ceasing to engage in any additional efforts to produce goods or services or to market remaining products in inventory to potential sellers. At that point, the focus of company activity is preparing for a permanent shutdown of the operation. As part of that preparation, the total assets and liabilities of the company are determined, including obligations to common and preferred shareholders.

In order to expedite the complete liquidation process, the company will transfer ownership of all assets, including any remaining cash reserves, to the shareholders. Along with receiving the assets, the shareholders also assume any remaining debts held by the company at the time operations were shut down. This means that the shareholders assume the liability for paying off those remaining debts, usually by establishing some type of schedule that prioritizes the debt, negotiating with creditors to accept less than the amount owed in exchange for considering the accounts settled, and utilizing whatever legal options are available to settle those final debts.

Once the shareholders have dealt with the remaining company debt, they are free to make use of the remaining assets in any way they see fit. This stage of the complete liquidation often involves selling off any remaining properties or other holdings that were not needed to settle the debt load, then dividing the cash among the shareholders. The actual amount of compensation provided to each shareholder is typically based on the class of stock held as well as the number of shares. In some cases, a shareholder may choose to accept an asset such as real estate or some other holding of the company as compensation, assuming the current market value of that asset is at or near the amount of compensation allocated to that holder. The complete liquidation is only considered to be final when all debt is settled and each shareholder has agreed to and received his or her share of the remaining assets.