What Is a Voluntary Liquidation?

A voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholders. Such a decision will happen once a company's leadership decides that the company has no reason to continue operating. It is not ordered by a court (not compulsory).

The purpose of a voluntary liquidation 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.

Key Takeaways

  • A voluntary liquidation involves the pre-mediated termination of a corporation by selling off its assets and settling its outstanding financial obligations.
  • The purpose of a voluntary liquidation is to cash out of a business that does not have a viable future or which has no other purpose in remaining operational.
  • Such a liquidation is not mandated by any court or regulatory body but must be approved by shareholders and the board of directors.

Understanding Voluntary Liquidations

The start of a voluntary liquidation resolution is initiated by a company's board of directors or ownership. Voluntary liquidations are then enacted when a resolution to cease operations (assuming that operations are ongoing) is approved by its shareholders.

Voluntary liquidations stand in contrast to involuntary liquidations. A shareholder vote allows the company to liquidate its assets to free up funds to pay debts. As such, voluntary liquidations may happen due to poor operating conditions (operating at a loss or the market moving in another direction), or due to business strategy considerations.

Such reasoning may be to exact a degree of tax relief for shutting down, or reorganizing and transferring assets to another company in exchange for an ownership or equity stake in the acquiring company. Voluntary liquidations may also be approved because the liquidating company was only meant to exist for a limited amount of time or for a specific purpose that has been fulfilled.

In addition, voluntary liquidation may happen if a key member of an organization leaves the company, and the shareholders decide not to continue operations.

Voluntary Liquidation Process

In the United States, voluntary liquidations may begin with the occurrence of an event as specified by a company's board of directors. In such cases, a liquidator is appointed. The liquidator answers to shareholders and creditors. 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.

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. Three-quarters of a company's shareholders must vote in favor of a voluntary liquidation resolution for the motion to pass.