What Is a Voluntary Liquidation?

A firm with its winding-down and dissolution authorized by its shareholders is said to be in voluntary liquidation. When the management of an organization determines there is no longer any justification for the business to be in operation, such a decision will be made. It is not a court-mandated mandate.

The goal is to pay off creditors by priority while winding down a business’s activities, closing its books, and dismantling its corporate structure in an orderly manner.

Recognizing a Voluntary Disposition

The board of directors or ownership of a corporation must propose a resolution for voluntary liquidation. The procedure starts after the company’s shareholders accept a resolution to suspend operations, provided that they are still in progress. Shareholder approval is required to liquidate assets to raise funds to meet obligations.

A forced liquidation is the compulsory sale of assets or securities to generate liquidity due to an unanticipated or unpredictable circumstance.

There are several justifications for a voluntary liquidation. Unfavorable business circumstances, such as operating at a loss, the market shifting, or concerns about corporate strategy, might be the cause. To get tax relief for closing, ownership may choose to reorganize and transfer assets to a different business in return for ownership or an equity interest in the new business.

Sometimes, the liquidating firm was created with a limited lifespan in mind, or it was created with a specific goal in mind that has been achieved. Another possible reason is the departure of a significant employee, in which case the shareholders decide to avoid going on with business as usual.

Process of Voluntary Liquidation

In the United States, a firm’s board of directors may designate an event that will cause a voluntary liquidation. A liquidator who answers to the shareholders and creditors is appointed.

The shareholders have the authority to oversee the voluntary liquidation if the firm is solvent.3. If the business is insolvent, shareholders and creditors may get a court order to manage the liquidation process. Stockholders holding two-thirds of the company’s shares must vote in favor of the voluntary liquidation unless the U.S. Comptroller of the Currency waives this condition.

There are two categories for voluntary liquidations in the U.K. One is the voluntary liquidation of creditors, which takes place after a company is declared insolvent. The third option is the members’ voluntary liquidation, which only needs a corporate bankruptcy declaration.

Williams & Wood McTear, “A Handbook for Voluntary Liquidations by Members.”

The company falls into the second category if it is solvent but has to sell off assets to pay off future debt. To approve a motion for a voluntary liquidation, the majority of a company’s shareholders must vote to support it.

Voluntary Liquidation: What Is It?

In a voluntary liquidation, the business’s operations are concluded, and its assets are sold to raise money to pay off its obligations. It leads to the company’s demise.

Who Launches an Initiatory Disposition?

The company’s ownership or board of directors must start the procedure. Still, in general, a vote of those owning either two-thirds of the company’s shares (in the United States) or three-fourths (in the United Kingdom) is required to ratify the decision.

What Makes a Business Decide Against a Voluntary Disposition?

There are many causes, from adverse economic circumstances endangering the firm’s survival to the departure of a critical employee, without which the ownership does not believe the company can continue. It’s possible that the corporation was only intended to exist for a certain period or for a specific goal that has been achieved. It’s also possible that the business is trying to restructure and move assets to another business or is searching for tax relief.

The Final Word

A firm may choose voluntary liquidation to end operations without a court judgment mandating dissolution. Despite significant differences between the United States and the United Kingdom, the board of directors must always start the process, and a certain percentage of shareholders must approve it. A firm’s creditors may also be engaged in initiating or completing the liquidation, depending on the circumstances.

Conclusion

• A voluntary liquidation is a company ending by selling its assets and paying off any remaining debts.
• A voluntary liquidation is carried out to cash out a firm with no other reason to continue operating or no sustainable future.
• A court order or regulatory authority cannot force such a liquidation; the company’s board of directors and shareholders must authorize it.