Definition
Voluntary liquidation is a self-initiated action by a company’s shareholders or owners to dissolve the company. This occurs when the owners believe the company can no longer sustain its operations or pay its debts. During the process, assets are sold off to pay creditors, and any remaining value is distributed among the shareholders.
Phonetic
The phonetics of the keyword ‘Voluntary Liquidation’ are:Voluntary – /vɒl·ənˌter·i/Liquidation – /ˌlɪk.wɪˈdeɪ.ʃən/
Key Takeaways
- Voluntary Liquidation is a self-imposed wind-up and dissolution of a company that has been approved by shareholders. This usually happens when a company’s directors decide they wish to discontinue the business due to reasons such as bankruptcy, cessation of business operations or the company’s inability to meet its financial obligations.
- There are two types of voluntary liquidation: Members’ voluntary liquidation (MVL), which happens when a company is solvent and can pay its debts in full and within the period stated in the company’s declaration of solvency; and Creditors’ voluntary liquidation (CVL), which happens when a company is insolvent and cannot pay its debts.
- Under voluntary liquidation, a liquidator is appointed by the shareholders to collect, distribute, and settle the affairs of the company. The process involves selling the company’s assets, paying off creditors, and distributing any remaining assets to the shareholders. Once all is settled, the company is formally dissolved.
Importance
Voluntary liquidation is a crucial term in business and finance because it refers to the deliberate decision of a company’s shareholders or directors to liquidate, or dissolve, the company. This process implies selling off the company’s assets, settling its debts, and sharing any remaining profit among the shareholders. This could be a strategic move, potentially to avoid compulsory liquidation or bankruptcy when the company might be facing financial trouble. Voluntary liquidation helps minimize losses and control the process under the company’s pace and terms, rather than facing legal action. It’s also important to creditors as it signifies the company’s intention to honor its debts before shutting down.
Explanation
Voluntary liquidation is an elective business process that primarily serves to wind down the operations of a company, pay off its debts, and distribute the remaining assets. Typically initiated by the company’s directors or shareholders, it is often utilized when a business is unable to generate substantial profits, becomes insolvent, or when the shareholders simply decide to cease business operations. The purpose behind voluntary liquidation is to provide an orderly dismantling of a company’s affairs, ensuring all liabilities are appropriately dealt with.The practice is used to ensure creditors and shareholders are treated fairly. During voluntary liquidation, asset distribution is carried out fairly and typically in order of priority. This priority generally begins with secured creditors, followed by unsecured creditors, and finally to shareholders if anything remains. By using voluntary liquidation, the company can avoid being forcefully liquidated by its creditors and maintain control over the process. It also gives the company the opportunity to restructure their operations, possibly marking the end of one venture and the beginning of another.
Examples
1. Blockbuster Voluntary Liquidation: Well-known video rental company, Blockbuster went through a voluntary liquidation process after it faced increased competition from online streaming media like Netflix, Hulu, and Amazon Prime. Recognizing that their outdated business model was no longer sustainable, they decided to voluntarily liquidate their assets to pay off creditors and shareholders.2. Toys “R” Us Voluntary Liquidation: Toys “R” Us was a popular multinational toy and juvenile-products retailer. However, with the growing popularity of E-commerce platforms like Amazon, Toys “R” Us struggled to compete, and in 2018, they announced a voluntary liquidation of their US operations owing to increasing debt and the overall decline in sales.3. Thomas Cook Voluntary Liquidation: The UK based travel firm, Thomas Cook, underwent voluntary liquidation in 2019. Despite being a well-established company in the travel industry, Thomas Cook was facing severe financial issues due to large debt and a changing travel market. The company sought to restructure its debt but when this failed they chose voluntary liquidation, selling off their assets to pay their debts.
Frequently Asked Questions(FAQ)
What is voluntary liquidation?
Voluntary liquidation is a self-imposed wind up and dissolution of a company, which has been approved by the shareholders. This usually happens when a company’s directors decide to cease business operations and dissolve the company.
Who decides a voluntary liquidation?
The decision is usually made by the company’s shareholders or guarantors.
What are some reasons a company might opt for voluntary liquidation?
Companies choose voluntary liquidation typically when they are unable to pay their debts, or if it is profitable to do so. Other reasons may include company restructuring, or the retirement of proprietors.
What is the difference between voluntary liquidation and involuntary liquidation?
Voluntary liquidation is initiated by the company’s shareholders or guarantors. Involuntary liquidation, on the other hand, is usually forced by court order, typically when a company is unable to meet its financial obligations.
What happens to the assets of the company during voluntary liquidation?
Unless exemptions apply, all assets of the company are sold and proceeds are used to repay creditors. Any remaining balance is then distributed among the shareholders of the company.
How long does the voluntary liquidation process usually take?
The length of the process can vary, typically taking between 6 to 24 months. It largely depends on the size and complexity of the company, as well as the efficiency of the liquidator.
Can a company continue to trade during voluntary liquidation?
In general, a company ceases its trading activities once the process of voluntary liquidation starts. However, in some instances, the company may continue to trade if it facilitates a better return for creditors.
Can a company back out of voluntary liquidation once the process has been initiated?
Once the resolution to wind up a company has been passed, the process is typically irreversible. However, exceptions might be possible depend on the jurisdiction of the company.
What is the role of a liquidator in voluntary liquidation?
A liquidator is responsible for winding up a company’s affairs. This includes selling assets, paying debts, distributing remaining assets among shareholders, and ultimately dissolving the company.Q0: What is the impact of voluntary liquidation on employees? A0: In most cases, employees are laid off as part of the liquidation process. However, in some jurisdictions, certain laws may help protect employee rights, ensuring they receive final wages or compensation.
Related Finance Terms
- Creditors’ Voluntary Liquidation (CVL): This refers to a decision made by the directors of a company that they should stop trading and dissolve the company because it can’t pay its debts.
- Members’ Voluntary Liquidation (MVL): This means that the shareholders of a solvent company have decided to liquidate their company assets, typically to restructure their business or to distribute cash assets to shareholders.
- Liquidator: This term refers to the person or entity appointed to administer the liquidation process. They are responsible for selling the company’s assets, paying off creditors, and distributing remaining assets to the shareholders of the company.
- Insolvency: This is a financial state in which a company is not able to pay off its debts. Insolvency is often a precursor to voluntary liquidation.
- Winding Up Order: This is a court order that forces an insolvent company into compulsory liquidation, a process wherein the company’s assets are sold to pay off creditors.
