What does 'Winding Up' mean

Winding up is the process of selling all the assets of a business, paying off creditors, distributing any remaining assets to the partners or shareholders and then dissolving the business. Winding up can refer to such a process either for a corporation or for a partnership. The term is used mostly in the United Kingdom. Elsewhere in the world it is known as liquidation.

BREAKING DOWN 'Winding Up'

The winding up of a corporation is a legal process that is regulated by corporate laws as well as a company's articles of association (or a partnership agreement in the case of a partnership). Winding up can be compulsory or voluntary and can apply to both public and private corporations and partnerships.

Compulsory Winding Up

Compulsory winding up occurs when a company is forced, by law and usually by a court order, to appoint a liquidator, sell off its assets and distribute the proceeds to its creditors. The process is often triggered by a company's creditors when they are unpaid and realize that the company is insolvent. The process is sometimes part of a bankruptcy proceeding, but not always. If the company does not have sufficient assets to pay off all of its debts, then the creditors may face an economic loss.

Voluntary Winding Up

In the case of a voluntary winding up, it is the shareholders (or partners) who trigger the process, through a resolution. The company may or may not be insolvent. If it is solvent, the reason for winding up may simply be that the shareholders feel that their objectives have been reached and that it is time to shut the company down and distribute its assets. A subsidiary may occasionally be wound up by a company because of its diminishing prospects or minimal contribution to the parent company's bottom line. The parent company may decide to wind up such a business if efforts to find a buyer for it are unsuccessful. If the company is insolvent, the shareholders may trigger a winding up to avoid bankruptcy or, in some cases, personal liability for the company's debts.

Effect of Winding Up

Once the winding up process has begun, a company can no longer pursue its business, except in order to complete the liquidation and distribution of its assets. At the end of the process, the company will be dissolved and will effectively cease to exist. Some examples of large companies that were liquidated include Circuit City Stores, Inc., RadioShack Corporation, Blockbuster, LLC and Borders Group, Inc.

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