Definition
Voluntary liquidation is a self-directed process where a company chooses to wind up its operations, sell off its assets, and dissolve. It typically occurs when a company is solvent and the stakeholders decide it’s the best strategy, rather than being compelled by creditors or a court. The proceeds from the sold assets are used to pay off any debts, with any remainder distributed among shareholders.
Key Takeaways
- Voluntary Liquidation is a self-imposed wind up and dissolution of a company that has been approved by its shareholders. It is initiated by the company’s directors when they believe the company is insolvent or that it will become insolvent in the near future.
- In this process, the company’s assets are liquidated (sold off), and the funds are used to pay off its debts. Any remaining assets are then distributed to the shareholders.
- It’s a legal process that generally protects the directors, as the decision to enter into voluntary liquidation is made by the shareholders. However, it can be costly and lengthy, often taking a year or more to finalize.
Importance
Voluntary liquidation is an important financial term because it refers to a critical decision made by a company’s shareholders or directors to dissolve the company willingly.
It’s a crucial strategy when the company is insolvent, or it can no longer pay its debts, or when the shareholders decide that the business is no longer viable.
This process is important as it helps in settling the company’s debts through asset distribution, protecting the company’s reputation while ensuring fairness in the debt payment process.
Furthermore, it provides an opportunity for stakeholders to recoup as much investment as possible.
Hence, understanding voluntary liquidation can offer valuable insight into a company’s financial health and its strategic decisions.
Explanation
Voluntary Liquidation serves a crucial purpose in the realm of financial management by enabling a company to systematically conclude its business operations on their own accord. Should a company find itself in an unfavorable position where running its businesses is financially unsustainable or uncompetitive, they may choose to go into voluntary liquidation.
This process serves the purpose of efficiently winding down company operations, paying off creditors, and ensuring any surplus is fairly dispersed among shareholders. It signifies a proactive approach, rather than waiting for creditors to trigger liquidation processes, thus offering the business more control over how its assets are distributed.
Voluntary liquidation is primarily used for ensuring orderly dissolution of the company. It prevents the chaos that may ensue if the company continues its operations despite insurmountable financial struggles, helping to maintain the business’s reputation while facilitating a cleaner exit from the market.
Filing for voluntary liquidation also aids in maintaining transparency with its stakeholders such as creditors and shareholders, as it signals the firm’s inability to continue profitable operations long before the situation worsens. This allows the shareholders to perhaps recover a portion of their investments and permits creditors to recoup at least a part of the money that was lent.
Examples of Voluntary Liquidation
Toys “R” Us Voluntary Liquidation: In 2018, the massive toy retailer Toys “R” Us initiated a voluntary liquidation process due to insurmountable debts and inability to compete in the current retail market. Despite being a well-known brand, the company could not meet its financial obligations and decided to voluntarily liquidate its assets, meaning to sell off its inventory, properties, and other assets to pay off creditors.
Sears Holdings Corp Voluntary Liquidation: In 2018, Sears, a historic American retailer filed for Chapter 11 bankruptcy and underwent voluntary liquidation. The company had been losing money and closing stores for years. Therefore, in an effort to pay off their debts, the company made the decision to liquidate a major part of its assets.
Nortel Networks Voluntary Liquidation: The Canada-based telecommunication and networking company Nortel, also underwent voluntary liquidation in
Due to the debts that could not be handled and business operations that were no longer sustainable, the company chose to go under voluntary liquidation to pay off their debts by selling their assets.
FAQs for Voluntary Liquidation
What is voluntary liquidation?
Voluntary liquidation is a self-imposed wind up and dissolution of a company that has been approved by shareholders. Such a decision typically happens when a company’s directors decide that the business is no longer viable.
Why would a company opt for voluntary liquidation?
A company may opt for voluntary liquidation for a variety of reasons. Some common reasons include: It may be an older company that the owners wish to dissolve in order to retire, or it may be a company that is in financial trouble and wishes to avoid compulsory liquidation or bankruptcy.
What are the steps in a voluntary liquidation process?
The processes are usually initiated by the directors calling a meeting of the shareholders to propose a resolution for voluntary liquidation. If approved, a liquidator is appointed to sell off the company’s assets and distribute the proceeds to creditors. Once this is done, the company is dissolved.
What happens to employees in a voluntary liquidation?
In a voluntary liquidation, employees are likely to lose their jobs. However, they may have statutory rights to redundancy pay and other payments from the state if the company can’t pay them.
Related Entrepreneurship Terms
- Creditors’ Meeting
- Insolvency
- Liquidator
- Winding-Up Resolution
- Company Assets
Sources for More Information
- Investopedia – An extensive source of financial information that includes thorough explanations of finance terms such as Voluntary Liquidation.
- Corporate Finance Institute (CFI) – A professional institute that offers courses on financial modeling and valuation, among other topics. It has a useful glossary that includes definitions of terms such as Voluntary Liquidation.
- Fincyclopedia – An online encyclopedia that covers a wide range of finance-related topics, including Voluntary Liquidation.
- AccountingTools – A great resource for insights into finance and accounting principles. It covers a variety of finance terms like Voluntary Liquidation.
