Final answer:
When assets are liquidated, creditors are paid in a specific order known as the priority of payment. This order includes secured creditors, administrative expenses, priority claims, general unsecured claims, and equity claims.
Step-by-step explanation:
When assets are liquidated, creditors are paid in a specific order known as the priority of payment. The order of payment is generally as follows:
- Secured creditors: These are creditors who have a security interest in specific assets of the debtor. They have the right to be paid first from the proceeds of the sale of the secured assets.
- Administrative expenses: These include expenses incurred in the administration of the liquidation process, such as legal fees, accounting fees, and employee wages. These expenses are given priority over other unsecured claims.
- Priority claims: These claims include certain debts that are given priority by law, such as unpaid wages, employee benefits, and taxes owed to the government.
- General unsecured claims: These are the remaining debts owed to unsecured creditors, such as suppliers, vendors, and service providers.
- Equity claims: These are the claims of shareholders, who are the owners of the company. They are paid last, and usually receive nothing if there are insufficient assets to cover all the other claims.