What is 'Winding Up'

Winding up is the method of ending, or dissolving, a business. The winding up activity includes selling all assets, paying off creditors, and distributing remaining assets to the partners or shareholders. Winding up can refer to dissolving either a corporation or a partnership. Mostly used in the United Kingdom, the term is synonymous with liquidation.

BREAKING DOWN 'Winding Up'

Winding up a business is a legal process regulated by corporate laws as well as a company's articles of association or a partnership agreement. Winding up can be compulsory or voluntary and can apply to both publicly and privately held companies.

Compulsory Winding Up

Compulsory winding up happens when laws, or court orders, force a company to appoint a liquidator who sells assets and distributes the proceeds to creditors. A company’s creditors will often trigger the process. In time, creditors will realize that a company is insolvent due to unpaid bills. Winding up, or liquidation, is sometimes part of a bankruptcy proceeding. In some cases, a company may not have sufficient assets to satisfy all its debtors entirely, and then these creditors will face an economic loss.

Voluntary Liquidation

Shareholders or partners may trigger a voluntary winding up. Voluntary liquidation is usually brought on through a resolution. The company may or may not be insolvent. If solvent, the reason for winding up may be that the shareholders feel their objectives were met and that it is time to cease operations and distribute company assets. Sometimes market situations may paint a bleak outlook for a particular business. If the stakeholders decide the company will face insurmountable challenges, they may call for a resolution to dissolve the organization.   

A subsidiary may be wound up because of its diminishing prospects or minimal contribution to the parent company's bottom line. Another consideration for winding up a subsidiary is if the parent company is unable to secure a buyer for it. 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. 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 effectively cease to exist. 

Some examples of large companies that were liquidated include Circuit City, RadioShack, Blockbuster, Borders Group,  and most recently, the Weinstein Company.

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