Liquidation Priority


Liquidation is a term that describes what happens when a business ceases operations. The firm’s assets, or cash realized from selling off assets, are distributed to parties who have claims on those assets. The first priority is to pay creditors. Shareholders receive whatever is left over. The general rule is that the parties who accepted the most risk when they invested in or lent money to the business are paid last. Liquidation can occur when a firm is not insolvent, but the priority of claims remains the same. Investors who have an ownership interest in a firm are paid in order of priority based on the type of investment. Preferred stock owners are paid first. Holders of common stock are paid last. The Securities and Exchange Commission notes that in a Chapter 11 bankruptcy there may be two classes of common stock: old shares and shares issued after the bankruptcy filing. In this case, the newer shares have higher priority.

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