Reasons and Process of Voluntary Liquidation

Voluntary liquidation actually allows a business to shut down operations, liquidate assets, and dismantle its corporate structure while repaying specified creditors in order of seniority. Such liquidation isn’t commanded by any court or administrative body however should be supported by investors and the governing body. Deliberate liquidation is started by an organization’s investors or proprietorship when they vote in favor of a goal to stop further activities. In contrast to involuntary liquidations, the liquidation can only continue with the approval of the shareholders.

A shareholder vote authorizes the firm to liquidate its assets in order to pay off debts. When a corporation is compelled to liquidate and sell its assets due to economic situations, company regulations, or a court decision, it is known as an involuntary liquidation. As a result, voluntary liquidations may occur as a result of bad operational conditions (losing money or the market moving in the wrong direction) or company strategy reasons. Moreover, voluntary liquidation may occur if a vital individual from an association leaves the organization, and the investors choose not to proceed with tasks.

Reasons for Voluntarily Liquidation

Unfeasible operations or poor operating conditions: Voluntary liquidations, while not compulsory, may be the best option for enterprises with unviable operations and bad operating conditions. For instance, suppose a high-cost oil producer forecasts a time of low oil prices in the future. Even though they are not formally bankrupt, they may choose to liquidate voluntarily.

Tax relief: Another incentive to voluntarily liquidate activities is to take advantage of tax benefits associated with closing down, reorganizing, or transferring assets to other companies in exchange for shares in the acquiring company. It is advantageous to the target firm since the transferred equity component enjoys favorable tax treatment.

Special purpose(s): Another cause for voluntary liquidation is if a corporation is only in operation for a limited time and for a specified purpose. A special purpose entity (SPE) or special purpose vehicle (SPV), for example, is a subsidiary corporation founded only for the purpose of carrying financial commitments and isolating risk. The companies may be voluntary liquidated if they are no longer needed.

Departure of company founder (or another key executive): Finally, if a significant member of an organization leaves the company, a voluntary liquidation may follow. For example, if a company’s founder decides to leave and the shareholders decide not to continue operations, the company will cease to exist. When a founder builds a firm from the ground up, the company is not expected to function the same way when he or she retires.

Process of Voluntary Liquidation –

In such cases, a vendor is appointed; the outlet answers to investors and lenders. A vendor is a substance that sells resources for an organization. At the point when resources are exchanged, they are for the most part sold on an open market for cash and different reciprocals. Vendors have the legitimate ability to follow up for the benefit of an organization for different activities. If the company is solvent, the voluntary liquidation can be overseen by the shareholders. If the company is insolvent, creditors and owners can get a court order to control the liquidation process.

Liquidators effectively have the legal ability to sell assets and effectuate a liquidation on behalf of the firm. Trustees and liquidators are two terms that are used interchangeably. There are two types of voluntary liquidations in the United Kingdom.

  • The first is creditors’ voluntary liquidation, which occurs when a company is insolvent.
  • The second option is members’ voluntary liquidation, which simply necessitates a corporate bankruptcy declaration.

The corporation is still solvent in the second category. However, it will have to sell some of its assets in order to fulfill forthcoming obligations, such as a debt maturity date. For a members’ voluntary liquidation to be enacted, at least 75% of shareholders must vote in favor of it.

Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com