Liquidation
Liquidation turns a company's assets into cash to pay creditors when a business closes.
December 2023 | Published by Xero
Published Monday 31 August 2026
Table of contents
Key takeaways
- Liquidation is the process of turning a company's assets into cash to pay creditors, usually when a business closes.
- In the Philippines you can liquidate a solvent company voluntarily through the SEC, or an insolvent company through a court under the Financial Rehabilitation and Insolvency Act.
- Payment follows a set order of priority, so secured creditors, workers, other creditors and owners are paid in a defined sequence.
- Liquidation is different from dissolution and from insolvency, and it is not a form of bankruptcy under Philippine law.
What does liquidation mean?
Liquidation is the process of converting a company's assets into cash, usually to pay creditors when a business closes. The word can also describe a retailer selling off inventory cheaply to raise cash quickly.
Think of it as clearing the shelves and the balance sheet at the same time: you sell what the business owns, settle what it owes, and share out anything left. In the Philippines, how you do this depends on whether the company can still pay its debts.
Types of liquidation
There are two main tracks for liquidating a company in the Philippines, and the right one depends on whether the business is solvent or insolvent. A separate, informal meaning also applies to retailers clearing stock.
- Voluntary dissolution and liquidation of a solvent company under the Revised Corporation Code (Republic Act No. 11232), administered by the Securities and Exchange Commission (SEC)
- Court-supervised liquidation of an insolvent debtor under the Financial Rehabilitation and Insolvency Act (Republic Act No. 10142), often called FRIA
- Retail liquidation, where a shop sells inventory at low prices to raise cash, which is a commercial sale rather than a formal legal process
Why do businesses liquidate?
Businesses liquidate for very different reasons, and not all of them signal failure. Some owners plan it, while others reach it after debts become unmanageable.
- The owner decides to retire, move on, or follow a planned exit strategy
- Debts have grown beyond what the business can repay, so it helps to understand how to manage business debt before it reaches that point
- The company has served its purpose, such as a project or venture that has ended
- Selling the whole business as a going concern is not possible, unlike a buyer purchasing a trading business when buying a business
What happens during liquidation?
Under FRIA, a court issues a Liquidation Order and appoints a liquidator, who is an officer of the court. The liquidator's job is to preserve and maximise the value of the debtor's assets, sell them, and settle claims. The process usually moves through these steps.
- The court issues a Liquidation Order and appoints a liquidator to take control of the company's assets.
- The liquidator identifies and safeguards the assets, then works out what they are worth, which is where knowing how to value a company helps.
- The assets are sold, turning property, stock and equipment into cash.
- Creditors submit their claims, and the liquidator reviews them.
- The proceeds are distributed according to the legal order of priority, and any remainder goes to the owners.
Who gets paid first in a liquidation?
Payment follows the Civil Code rules on concurrence and preference of credits (Articles 2241 to 2244), applied through FRIA. The order has two layers, because assets pledged to a specific creditor are treated differently from the general pool of assets.
- A creditor holding a registered mortgage or pledge over a specific asset is paid first from that specific asset
- Workers' unpaid wages and monetary claims get first preference in the general pool of assets under Article 110 of the Labor Code
- Other creditors are paid from the general pool according to their legal ranking
- Owners and shareholders are paid last, and only if money remains after all creditors are settled
Liquidation vs bankruptcy and insolvency
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People often say "bankruptcy", but the Philippines has no bankruptcy proceeding. The legal terms are insolvency, rehabilitation and liquidation under FRIA, and each means something specific.
Insolvency is the financial condition of being unable to pay debts as they fall due, and you can compare it with staying solvent in this guide on liquidity versus solvency. Liquidation is the process of winding up. FRIA also separates rehabilitation, which restores a viable business to solvency, from liquidation, which winds up a business when rehabilitation is not feasible. Liquidation can be voluntary, where the insolvent debtor files, or involuntary, where three or more creditors petition.
Liquidation vs dissolution
Dissolution and liquidation are linked stages, and it helps to keep them separate in your mind. Dissolution ends the company's legal existence, while liquidation is the winding-up process that follows, covering the sale of assets, payment of creditors and distribution of any remainder.
Under the Revised Corporation Code (Sec. 139), a dissolved corporation stays a body corporate for three years to wind up its affairs, settle debts and distribute assets, not to keep trading. In an insolvency case, the court's Liquidation Order declares the company dissolved and starts liquidation together.
What is liquidation in accounting?
In accounting, liquidation is the process of closing a business, selling its assets, paying creditors, and distributing any remaining assets to owners or shareholders. It is the point where the books are settled and the accounts are brought to a close.
For a small business owner, this means keeping clear records of what you own, what you owe, and what remains, so the final distribution is accurate and easy to explain.
Wind up your business with confidence using Xero
Whether you are winding up by choice or working through insolvency, clean, up-to-date records make every step easier, from valuing assets to settling creditor claims. Xero keeps your bookkeeping, cash flow and reporting in one place, so you always know where the business stands.
If you are preparing to close a company, you can start on Xero today and get one month free to organise your finances before the process begins.
FAQs on liquidation
Here are quick answers to common questions Philippine small business owners ask about liquidation.
Is liquidation the same as closing a business?
Closing a business is the goal, and liquidation is the formal process that gets you there by selling assets and paying creditors. A company can also close after rehabilitation instead of liquidation if it becomes viable again.
Who appoints the liquidator?
In a court-supervised case under FRIA, the court appoints the liquidator as an officer of the court. This keeps the process independent of the owners and the creditors.
Can a solvent company be liquidated?
Yes, a solvent company can be dissolved and liquidated voluntarily through the SEC under the Revised Corporation Code. This is a planned wind-up rather than an insolvency proceeding.
Do shareholders get anything back?
Shareholders are paid last, and only if cash remains after every creditor claim is settled. In many insolvent liquidations, nothing is left to distribute to owners.
How long does a dissolved corporation have to wind up?
A dissolved corporation stays a body corporate for three years under Section 139 of the Revised Corporation Code to settle debts and distribute assets. It cannot use that period to keep trading.
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.