Liquidation is the process of winding up a company's affairs by selling off its assets and distributing the proceeds to creditors and shareholders according to a legal order of priority. It occurs when a company is insolvent or unable to pay its debts. Liquidation can be voluntary, initiated by the company's directors or shareholders, or involuntary, initiated by creditors through a court process. The purpose is to ensure fair distribution of assets among creditors and protect the interests of stakeholders.

Liquidation and insolvency are necessary mechanisms for resolving financial distress, providing an orderly winding down of businesses that are no longer viable. This process helps salvage some value for creditors and shareholders and prevents unfair treatment of stakeholders.

In transactions involving assets with fluctuating values such as expensive paintings, digital assets from crypto platforms, stocks, or NFTs, liquidation and insolvency considerations are crucial. Banks may require additional funds as a liquidity safeguard during asset transactions to mitigate potential losses if the asset's value decreases before the transaction is completed. This liquidity, typically ranging from 5-20%, is not a payment but a protective measure to ensure the successful completion of the transaction. It is returned to the customer once the transaction is finalized or cancelled. Liquidation and insolvency awareness is essential for individuals and companies engaging in transactions involving assets with unpredictable market values.

Explanation for Liquidation and Insolvency: A Simplified Guide