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The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.
Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation following bankruptcy, which may result in the court creating a "liquidation trust") or voluntary (sometimes referred to as a shareholders' liquidation, although some voluntary liquidations are controlled by the creditors).
The term "liquidation" is also sometimes used informally to describe a company seeking to divest of some of its assets.
For instance, a retail chain may wish to close some of its stores.
For efficiency's sake, it will often sell these at a discount to a company specializing in real estate liquidation instead of becoming involved in an area it may lack sufficient expertise in to operate with maximum profitability.
When liquidation occurs the company does not have the power to dispose of its property.
A creditors’ voluntary liquidation (CVL) is a process designed to allow an insolvent company to close voluntarily.
The decision to liquidate is made by a board resolution, but instigated by the director(s).
The liquidator may also have to determine whether any payments made by the company or transactions entered into may be voidable as a transaction at an undervalue or an unfair preference.
The assets and property of the company are redistributed.
Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation.
The main purpose of a liquidation where the company is insolvent is to collect its assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law.
The liquidator must determine the company's title to property in its possession.