What Is Winding Up?
Winding up is the process of liquidating a company. While winding up, a company ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any remaining assets to partners or shareholders. The term is synonymous with liquidation, which is the process of converting assets to cash.
- Winding up refers to the process of liquidating the assets of a business that has ceased operations.
- The sole purpose of a business that is winding up is to sell off assets, pay off creditors, and distribute any remaining assets to the owners.
- The two main types of winding up are compulsory winding up and voluntary winding up.
- Winding up a business is not the same as bankruptcy, although it is usually an end result of bankruptcy.
How Winding Up Works
Winding up a business is a legal process regulated by corporate laws as well as a company's articles of association or partnership agreement. Winding up can be compulsory or voluntary and can apply to publicly and privately held companies.
Compulsory Winding Up
A company can be legally forced to wind up by a court order. In such cases, the company is ordered to appoint a liquidator to manage the sale of assets and distribution of the proceeds to creditors.
The court order is often triggered by a suit brought by the company's creditors. They are often the first to realize that a company is insolvent because their bills have remained unpaid. In other cases, the winding-up is the final conclusion of a bankruptcy proceeding, which can involve creditors trying to recoup money owed by the company.
In any case, a company may not have sufficient assets to satisfy all of its debtors entirely, and the creditors will face an economic loss.
Voluntary Winding Up
A company's shareholders or partners may trigger a voluntary winding up, usually by the passage of a resolution. If the company is insolvent, the shareholders may trigger a winding-up to avoid bankruptcy and, in some cases, personal liability for the company's debts.
Even if it is solvent, the shareholders may feel their objectives have been met, and it is time to cease operations and distribute company assets.
In other cases, market situations may paint a bleak outlook for the business. If the stakeholders decide the company will face insurmountable challenges, they may call for a resolution to wind up the business. A subsidiary also may be wound up, usually because of its diminishing prospects or its inadequate contribution to the parent company's bottom line or profit.
Winding Up vs. Bankruptcy
Winding up a business is not the same as bankruptcy, though it is usually an end result of bankruptcy. Bankruptcy is a legal proceeding that involves creditors attempting to gain access to a company's assets so that they can be liquidated to pay off debts.
Although there are various types of bankruptcy, the proceedings can help a company emerge as a new entity that is debt-free and usually smaller.
Conversely, once the winding-up process has begun, a company can no longer pursue business as usual. The only action they may attempt is to complete the liquidation and distribution of its assets. At the end of the process, the company will be dissolved and will cease to exist.
For example, Payless, the shoe retailer, filed for bankruptcy in April 2017, almost two years before the business finally ceased operations. Under court supervision, the company shut down about 700 stores and repaid about $435 million in debt. Four months later, the court allowed it to emerge from bankruptcy.
It continued to operate until February 2019, when it abruptly shut down its remaining 2,500 U.S. stores and filed again for bankruptcy, effectively beginning the winding-up process. It also wound down its e-commerce business at the time. The liquidation in 2019 did not have any effect on its Latin American operations, which, in 2020, when the company emerged from bankruptcy, was its new focus.
In 2020, the company also began expanding again in the U.S., opening more stores, as it felt there was an opportunity for its goods.
Some other examples of well-known American companies that were liquidated, or wound up, include
- Circuit City
- Borders Group
All of the above retailers were in deep financial distress before filing for bankruptcy and agreeing to liquidate.
What Is the Difference Between Winding Up and Dissolution?
Winding up and dissolution are both steps in the closing of a business. Winding up comes before dissolution. Winding up refers to closing the operations of a business, selling off assets, paying off creditors, and distributing any remaining assets to the owners. Once the winding-up process is complete, the dissolution step comes into play. This is when the company formally under law ceases to exist. Documentation is prepared to officially end the business as a legal entity.
What Are the Legal Consequences of Not Dissolving a Business?
If you do not legally dissolve a business, you can incur taxes and penalty fees. These taxes and fees can be incurred even if your business is not operating or earning any revenue/income. When a business has determined it will no longer operate and it has wound up operations, it must legally dissolve.
How Long Does It Take to Wind Up a Business?
There are multiple steps in winding up a business. It takes approximately two to three months to enter the liquidation process. From there, the liquidation process can last a few months to a year, depending on how long it takes to sell off assets.