Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.

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Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.

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Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.

Explanation & AnswerSolution by a verified expert

Explanation

Liquidations lead to the selling of the company's assets to pay all the creditors and shareholders. However, the proceeds for sale are distributed as per the priority of claims under Chapter 7 of the bankruptcy law. This leads to payment of liquidation charges first, which leaves less amount for creditors who may not receive the full amount for their claims. Since creditors have a higher priority of claims than shareholders, sometimes shareholders do not receive anything. This leads to the loss of shareholders.
 
Partial liquidation over a period of time leads to more costs associated with the liquidation process, which leaves even fewer funds for creditors and shareholders, further increasing their losses. Some assets may deteriorate in value over time, which may reduce the proceeds from the sale of those assets decreasing the funds available to the creditors and shareholders. Hence partial liquidation over time leads to an increase in the losses.

Verified Answer

Liquidation leads to selling the company's assets to pay the claims of creditors and shareholders. The sale proceeds may not cover all the claims as there are legal charges also involved which are given priority in payment, which leads to losses of creditors and shareholders.
 
Liquidation over time leads to an increase in liquidation cost, which further deteriorates the value of the company.

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