Voluntary Liquidation: Definition and Process

What Is a Voluntary Liquidation?

A voluntary liquidation is the self-imposed windup and dissolution of a company approved by its shareholders. This decision occurs when the company’s leadership determines that there is no reason to continue operating. It is not a compulsory court order.

The purpose is to terminate the company’s operations, wrap up its financial affairs, and dismantle its corporate structure in an orderly fashion while paying back creditors.

Key Takeaways

• A voluntary liquidation involves selling off a corporation’s assets and settling outstanding financial obligations.
• The purpose is to cash out of a business that has no viable future or other purpose in remaining operational.
• A voluntary liquidation requires approval from the company’s shareholders and board of directors.

Understanding Voluntary Liquidation

A voluntary liquidation must be initiated by a company’s board of directors or ownership. It begins after shareholder approval to cease operations, allowing asset liquidation to free up funds for debt repayment.

Voluntary liquidation is different from forced liquidation, which results from unforeseen or uncontrollable situations that require the involuntary sale of assets or securities to create liquidity.

The reasons for voluntary liquidation can include unfavorable business conditions, changes in the market, strategic considerations, tax relief, asset transfer to another company, or the fulfillment of a specific purpose.

In some cases, a key company member leaving could lead to a decision not to continue operations.

Voluntary Liquidation Process

In the United States, a voluntary liquidation may begin with a specified event determined by the company’s board of directors. If the company is solvent, shareholders supervise the liquidation. If not, a court order allows creditors and shareholders to control the process. The U.S. Comptroller of the Currency may waive this requirement if stockholders owning two-thirds of the company’s shares vote in favor of the liquidation.

In the United Kingdom, voluntary liquidations fall into two categories. Creditors’ voluntary liquidation occurs under corporate insolvency, while members’ voluntary liquidation only requires a corporate declaration of bankruptcy. In the second category, three-quarters of stockholders must vote in favor of the liquidation resolution for it to pass.

Who Can Initiate a Voluntary Liquidation?

The company’s ownership or board of directors initiates the process. However, the decision must generally be approved by a vote of those holding the specified percentage of the company’s shares.

Why Choose Voluntary Liquidation?

Companies choose voluntary liquidation for various reasons, including unfavorable business conditions, the loss of a key figure, meeting temporary or specific purposes, seeking tax relief, or reorganizing and transferring assets to another company.

The Bottom Line

Voluntary liquidation is a process by which a company ceases doing business without a court order. The process requires the board of directors’ initiation and shareholder approval. Creditors may also be involved in the liquidation process, depending on the circumstances.