What Is Voluntary Liquidation? Definition and How It Happens

What Is a Voluntary Liquidation?

A voluntary liquidation is a self-imposed windup and dissolution of a company that has been approved by its shareholders. Such a decision will happen once an organization’s leadership decides that the company has no reason to continue operating. It is not a compulsory order by a court. The purpose is to terminate a company’s operations, wrap up its financial affairs, and dismantle its corporate structure in an orderly fashion while paying back creditors according to their assigned priority.

Understanding a Voluntary Liquidation

A voluntary liquidation resolution must be initiated by a company’s board of directors or ownership. The process begins after a resolution to cease operations (assuming that operations are ongoing) is approved by the company’s shareholders. The shareholder vote allows the liquidation of assets to free up funds to pay debts. A voluntary liquidation stands in contrast to a forced liquidation, which involves the involuntary sale of assets or securities to create liquidity due to an unforeseen or uncontrollable situation.

The reasons for a voluntary liquidation are numerous. It may happen due to unfavorable business conditions, such as operating at a loss or the market moving in another direction, or business strategy considerations. Ownership may want to exact a degree of tax relief for shutting down or decide to reorganize and transfer assets to another company in exchange for an ownership or equity stake in the acquiring company.

In some cases the liquidating company was only meant to exist for a limited amount of time or for a specific purpose that has been fulfilled. It can also be due to a key company member leaving, which causes the shareholders to decide not to continue operations.

Voluntary Liquidation Process

In the United States, a voluntary liquidation may begin with the occurrence of an event as specified by a company’s board of directors. In such cases a liquidator who answers to shareholders and creditors is appointed. If the company is solvent, the shareholders can supervise the voluntary liquidation. If the company is not solvent, creditors and shareholders may control the liquidation process by getting a court order. Unless the Controller of the Currency waives this requirement, stockholders owning two-thirds of the company's shares must vote in favor of the voluntary liquidation.

Voluntary liquidations in the United Kingdom are divided into two categories. One is the creditors’ voluntary liquidation, which occurs under a state of corporate insolvency. The other is the members’ voluntary liquidation, which only requires a corporate declaration of bankruptcy. Under the second category, the firm is solvent but needs to liquidate its assets to meet its upcoming obligations. Stockholders owning three-quarters of a company’s shares must vote in favor of a voluntary liquidation resolution for the motion to pass.

The Bottom Line

Voluntary liquidation is a process by which a company ceases doing business without a court order requiring dissolution. The process is slightly different in the U.S. and the U.K., but both require that the board of directors institute the process and a specified percentage of shareholders approve it. Depending on the situation, a company's creditors may also be involved in instigating or carrying out the liquidation.