What is Liquidation?

Jakarta, Pintu News – Liquidation is a legal process in which a company ceases its business operations and sells all assets to pay off debts to creditors. This process usually occurs when the company is no longer able to meet its financial obligations and has no prospect of getting back on its feet. The main objective of liquidation is to settle debts in an orderly manner and formally end the company’s existence.

In a broader economic context, liquidation also reflects the final phase of a company’s life cycle. Once liquidation is complete, the company is no longer in operation and its legal status is dissolved from official state records.

Definition of Liquidation According to the Company Law

According to the Limited Liability Company Law (UU PT) No. 40 of 2007, liquidation is the process of settling the company’s assets to fulfill obligations to creditors and shareholders after the company is dissolved. This law stipulates that liquidation begins after the dissolution decision is made by the GMS or based on the provisions of the law.

In the relevant article, the PT Law requires that liquidation be carried out by a liquidator who is appointed to manage and resolve the company’s obligations to completion, including debts to creditors, payment of compensation, and distribution of remaining assets to shareholders.

Types of Company Liquidation

Types of liquidation are generally divided into voluntary liquidation and forced liquidation (winding up). Voluntary liquidation occurs when shareholders decide to close the company by their own agreement, for example because the objectives of the establishment have been achieved or the business strategy changes.

Whereas forced liquidation is usually carried out based on a court decision, especially when the company is in default or bankruptcy. In this case, the court appoints a liquidator who is responsible for the settlement of the company’s assets and debts in accordance with the law.

Step-by-Step Liquidation Process

The stages of liquidation generally begin with a decision to dissolve the company, either by the shareholders or a court decision in case of severe default. After that, a liquidator is appointed to inventory the company’s assets and liabilities.

The next step is the sale of company assets, settlement of debts to creditors, and management of other rights and obligations in accordance with legal provisions. If there are still assets remaining after all debts have been repaid, then the remainder is distributed to shareholders.

Causes and Impact of Liquidation

Liquidation is often triggered by a company’s inability to meet financial obligations, long-term negative operating margins, or drastic changes in market conditions. Companies that continue to lose money eventually run out of liquidity and are unable to repay debts to creditors.

The impact on shareholders can be significant as they usually come last in the distribution of the remaining assets, often getting nothing after the debts are paid off. For creditors, liquidation means they may receive some or all of their receivables depending on the realized value of the company’s assets.

Read also: How much is 1 gram of gold pawned? Here’s the full explanation!

Difference between Liquidation vs Bankruptcy

Liquidation and bankruptcy are often considered similar, but legally there are important differences. Bankruptcy is a legal status when a company is declared unable to pay debts as they fall due, and this can trigger a bankruptcy filing with the court.

Meanwhile, liquidation is the process of winding up and settling assets after dissolution, which can occur due to an internal decision of the company or as a result of a court ruling when it is insolvent. Bankruptcy is usually followed by a liquidation process, but liquidation is not always caused by bankruptcy.

Recent Liquidation Case Example

An example of an industry liquidation case that gained attention was when several large retail companies in various countries decided to liquidate due to post-pandemic economic pressures, declining sales, and increasing debt burdens. Many of these cases illustrate how previously profitable businesses can end up liquid when market conditions change drastically.

In Indonesia itself, there have also been cases of liquidation of MSME businesses after profit margins were eroded by price competition, such as the small retail sector that was unable to compete with large e-commerce. These cases serve as lessons on the importance of risk management in business.

Liquidation in Crypto and Stock Trading

In the context of modern financial markets, the term liquidation is also used in crypto trading and stock futures (derivatives) to denote the automatic closing of positions by brokers when there is insufficient margin. For example, margin traders in the cryptocurrency market may experience liquidation when the asset price moves against their position such that the margin is no longer eligible.

This kind of liquidation differs from corporate liquidation in that it relates to the closure of individual trading positions, not the closure of a business. In the margin stock market, a similar mechanism may also occur if the equity value falls below the broker’s margin requirements.

Read also: What is the 24 Karat Gold Code? A Complete Guide to Grades & Standards

Common Mistakes and How to Avoid Them

A common mistake that often occurs in the context of corporate liquidation is a lack of financial planning, such as not having sufficient capital reserves to deal with challenging market conditions. Other mistakes include ignoring early indications of declining revenue and negative cash flow, which should have been an alarm to take strategic action.

To avoid unwanted liquidation, companies need to conduct disciplined risk planning and cash management, monitor financial performance regularly, and prepare business diversification strategies that can help the company survive when facing market pressures.

Follow us on Google News to stay up to date with the latest in crypto and blockchain technology. Check Bitcoin price, usdt to idr and tokenized nvidia stock price through Pintu Market.

Enjoy an easy and secure crypto trading and crypto gold investment experience by downloading the Pintu crypto app via Play Store or App Store now. Also, experience web trading with advanced trading tools such as pro charting, various order types, and portfolio tracker only at Pintu Pro.

*Disclaimer

This content aims to enrich readers’ information. Pintu collects this information from various relevant sources and is not influenced by outside parties. Note that an asset’s past performance does not determine its projected future performance. Crypto trading activities are subject to high risk and volatility, always do your own research and use cold hard cash before investing. All activities of buying and selling Bitcoin and other crypto asset investments are the responsibility of the reader.

Reference:

• Featured Image: Generated by AI