Liquidator

What Is a Liquidator?

A liquidator is a person or entity that liquidates something — generally assets. When assets are liquidated, they are sold on the open market for cash or other equivalents. The liquidator is legally empowered to act on behalf of the company in various capacities.

A liquidator refers to an officer who is specially appointed to wind up the affairs of a company when the company is closing — typically when the company is going bankrupt. Assets of a company are sold by the liquidator and the resulting funds are used to pay off the company's debts.

In some jurisdictions, a liquidator may also be named as a trustee, as in a bankruptcy trustee.

Understanding Liquidators

A liquidator is a person with the legal authority to act on behalf of a company to sell the company's assets before the company closes in order to generate cash for a variety of reasons including debt repayment.

Liquidators are generally assigned by the court, by unsecured creditors, or by the company's shareholders. They are often employed when a company goes bankrupt. Once the liquidator is assigned, they will then take over control of the person or organization's assets. These are then pooled together and sold off one by one. Cash received from the proceeds of the sale is then used to pay off the outstanding debt held by unsecured creditors.

One of the chief functions of many liquidators is to bring and defend lawsuits. Other actions include collecting outstanding receivables, paying off bills and debts, and finishing other corporate termination procedures.

A liquidator has the legal authority to act on behalf of a company to sell its assets or to bring on and defend lawsuits.

Powers and Duties of the Liquidator

A liquidator's authority or power is defined by the laws where the role is assigned. The liquidator may be granted complete authority over all matters of the business until the assets are sold and the debts are all paid off. Some others are granted liberties, while still under the supervision of the court.

The liquidator has a fiduciary and legal responsibility to all parties involved — the company, court, and the creditors involved. Generally considered to be the go-to person when it comes to making any decisions about the company and its assets, the liquidator must keep them under their own control to ensure they are properly valued and dispersed after they are sold. This person issues any correspondence and holds meetings with creditors and the company in question to ensure the liquidation process goes through smoothly.

Chapter 7 of the U.S. Bankruptcy Code governs liquidation proceedings. Solvent companies may also file for Chapter 7, but this is uncommon.

How Is a Liquidator Paid?

Liquidators charge fees for their services, This cost will vary depending on the size of the business, the complexity of the case, and the time needed to complete the job. The Insolvency Act 1986 specifies the absolute priority (also known as the liquidity preference) with which stakeholders are repaid in the event of a bankruptcy or liquidation.

Per the law, liquidators' fees and expenses are always first to be paid. Payments are then made to senior secured creditors, unsecured and subordinated creditors, preferred shareholders, and lastly common shareholders.

Liquidators aren't always part of the liquidation process. A voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholders. Such a decision will happen once a company's leadership decides that the company has no reason to continue operating. In some cases, the company may decide to undertake the process on its own.

Liquidation Sales

Companies may also engage in liquidation sales to reduce costly inventory at rock-bottom prices. It isn't uncommon to see a retailer advertising a liquidation sale, selling off as much of, if not all, of their stock — often at a deep discount to consumers. In some cases, this may be due to insolvency, but don't always do this because they're closing down. In fact, some stores do this to get rid of and replace the older stock with new inventory.

Examples of Liquidators

Many retailers undergo liquidation under a liquidator in order to dispose of their assets because of a looming bankruptcy. The liquidator assesses the business and its assets and may make decisions on when and how to sell them. New inventory shipments will be stopped and the liquidator may plan for sales of the current stock. Everything under the retailer's banner including fixtures, real estate, and other assets will be sold. The liquidator will then organize the proceeds and pay off the creditors.

One example is the shoe retailer Payless. Saddled with debt, retailer Payless filed for Chapter 11 in 2017 with plans to liquidate almost every store it owned in the United States and Canada. Although it managed to restructure and survive that period, it wasn't fully out of the lurch. The company filed for bankruptcy again in February 2019, saying it would close all of its retail locations across North America — about 2,100 stores — selling its merchandise at a discount to consumers.

But liquidators are not only assigned to retailers. Other businesses that face trouble may require a liquidator. They may be required to deal with issues after a merger takes place when one company buys out another. For instance, when a merger takes place, one company's information technology (IT) department may become redundant. The liquidator may be assigned to sell off or divide the assets of one.