What legal procedure is used for liquidating a business that cannot pay its debts?

The correct choice is bankruptcy, which is a legal procedure designed specifically for individuals or businesses that are unable to repay their outstanding debts. When a business files for bankruptcy, it allows for the reorganization of its debts or liquidation of its assets under the supervision of a court. This process aims to provide relief to the debtor while also ensuring fair treatment of creditors.

During bankruptcy proceedings, different types can be pursued based on the situation, including Chapter 7 (liquidation) and Chapter 11 (reorganization) in the U.S. Each of these types offers distinct pathways for addressing the debts of a business that cannot pay what it owes.

While liquidation refers to the process of selling off assets to pay creditors, it is often a component of bankruptcy rather than a standalone legal procedure. Divestiture involves selling parts of a business to improve its financial standing or focus on core operations, and retrenchment is more related to reducing the scale or scope of operations as a response to financial difficulties, not a formal legal procedure for handling insolvency. Therefore, bankruptcy is the primary legal framework utilized for managing situations where a business cannot meet its financial obligations.