Liquidation
Learn what liquidation means, how it works in Canada, and who gets paid first when a business sells its assets.
December 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Liquidation means turning a business's assets into cash to pay off what it owes.
- It can be voluntary, when a solvent business winds up, or forced, when an insolvent business can't pay its debts.
- In Canada, liquidation runs under the Bankruptcy and Insolvency Act and is administered by a Licensed Insolvency Trustee.
- Creditors are paid in a set order, with employees holding a limited super-priority for unpaid wages.
What does liquidation mean?
Liquidation is the process of selling off a business's assets to raise cash and pay its debts. It's the step a company takes when it closes down, whether by choice or because it can't cover what it owes.
During liquidation, everything the business owns is converted into money. That money then goes toward settling debts, and anything left over is shared among the owners.
Picture a retail shop that's closing. It sells off its remaining inventory, fixtures, and equipment at a clearance sale, then uses the proceeds to pay suppliers and other creditors. Those items are its assets, and the sale turns them into cash.
What is liquidation of a company or business?
Liquidating a company means winding it down and turning its assets into cash. This usually happens in one of three situations.
- The owners decide to close a healthy business and there's enough money to pay every debt
- The business can't keep trading profitably and its owners choose to wind it up
- The business can't pay its debts and becomes bankrupt under the Bankruptcy and Insolvency Act (BIA)
Types of liquidation
Not every liquidation looks the same. The type depends on whether the business can still pay its debts and on who starts the process.
- Voluntary (solvent) wind-up: the owners close a viable business and there's enough money to pay all its debts
- Creditors' or insolvent liquidation: the business can't pay its debts, so its affairs are wound up for the benefit of creditors
- Court-ordered (forced) liquidation: a court orders the business to be wound up, often after a creditor applies
What happens when a company is liquidated?
When a company is liquidated, its trading operations stop, its assets are sold, and its creditors are identified so they can be repaid in order. The process follows a clear legal framework.
In Canada, a Licensed Insolvency Trustee (LIT) takes control of the estate. The LIT is the only professional licensed to administer insolvency proceedings under the Bankruptcy and Insolvency Act (BIA), and collects the assets, sells them, and distributes the proceeds to creditors.
Every Licensed Insolvency Trustee is licensed and overseen by the Office of the Superintendent of Bankruptcy (OSB), which keeps the process fair and accountable.
Who gets paid first in a liquidation?
The money raised from selling a business's assets is paid out in a set order under the BIA. Those with the strongest legal claim are paid before anyone else.
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- Secured creditors: realize the assets pledged as security separately from the general pool
- Employees: hold a super-priority for unpaid wages of up to $2,000 each over the employer's current assets under the BIA
- Costs of administering the estate: the trustee's fees and the OSB levy
- Preferred creditors under the BIA: remaining wage claims, certain municipal taxes, and rent arrears
- Ordinary unsecured creditors: suppliers and credit card balances
- Shareholders or owners: paid last, only if funds remain
If a bankrupt or receivership employer can't cover unpaid wages, employees may also claim under the federal Wage Earner Protection Program (WEPP), which pays eligible workers up to seven times the maximum weekly Employment Insurance insurable earnings ($9,275.00 for proceedings in 2026).
Liquidation, bankruptcy, receivership and dissolution
These terms are often used interchangeably, but each describes a different thing. Knowing the difference helps you understand where liquidation fits.
- Liquidation: converting assets to cash, which can happen in a solvent wind-up or in a bankruptcy
- Bankruptcy: a legal insolvency process under the BIA, run by a Licensed Insolvency Trustee, in which a company's assets are gathered and distributed to creditors
- Receivership: a secured creditor appoints a receiver to recover what it's owed
- Dissolution: formally ending the company's legal existence once it has no remaining property or liabilities
What is liquidation in accounting?
In accounting, liquidation is the winding-up process recorded in a business's books. It captures the steps a company takes as it closes for good.
That process means shutting down the business, selling its assets, and paying creditors in order. Once all liabilities are settled, any remaining funds are distributed to the shareholders.
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FAQs on liquidation
Here are answers to some frequently asked questions about liquidation to help you understand how the process works.
Is liquidation the same as bankruptcy?
No. Liquidation is the act of selling assets to raise cash, while bankruptcy is a legal insolvency process; liquidation can happen inside a bankruptcy or as part of a solvent wind-up.
What happens to employees when a company is liquidated?
Employees typically lose their jobs when the business stops trading, and they become creditors for any unpaid wages. Eligible workers may also claim through the Wage Earner Protection Program.
Who gets paid first when a company is liquidated?
Secured creditors are paid first from the assets pledged to them, followed by employees' wage super-priority and the costs of running the estate. Shareholders are paid last, if anything remains.
Is liquidation the same as closing or dissolving a business?
Not quite. Liquidation turns assets into cash to settle debts, while dissolution formally ends the company's legal existence once it has no remaining property or liabilities.
Related terms
Learn more about liquidation
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.