Voluntary liquidation is a company’s self-imposed winding up and dissolution that has received shareholder approval. When a company’s leadership determines that the company has no reason to continue running, such a decision will be made. It is not a judicial order (not compulsory).
The goal of a voluntary liquidation is to end a company’s operations, close its books, and liquidate its corporate structure in a timely and orderly manner while paying creditors according to their priority.
What Is Voluntary Liquidation and How Does It Work?
Voluntary liquidation allows a business to shut down operations, liquidate assets, and dismantle its corporate structure while repaying specified creditors in order of seniority.
When a company’s shareholders or ownership vote for a resolution to end operations, it is called voluntary liquidation. Only the shareholders’ consent is required for the liquidation to occur.
Reasons for Liquidation Voluntarily
Impossible Operations or Unfavourable Working Conditions
Voluntary liquidations, while not compulsory, may be the best option for enterprises with unviable operations and bad operating conditions. For instance, suppose a high-cost oil producer forecasts a time of low oil prices in the future. Even though they are not formally bankrupt, they may choose to liquidate voluntarily.
Reduction in Taxes
Another incentive to voluntarily liquidate activities is to take advantage of tax benefits associated with closing down, reorganising, or transferring assets to other companies in exchange for shares in the acquiring company. Again, it is advantageous to the target firm since the transmitted equity component enjoys favourable tax treatment.
Another cause for voluntary liquidation is if a corporation is only in operation for a limited time and a specified purpose. A special-purpose entity (SPE) or special purpose vehicle (SPV), for example, is a subsidiary corporation founded only to carry financial commitments and isolate risk. If the companies are no longer needed, they may be liquidated voluntarily.
The Founder of the Company Has Left the Company (or Another Key Executive)
Finally, if a significant member of an organisation leaves the company, a voluntary liquidation may follow. For example, if a company’s founder decides to leave and the shareholders decide not to continue operations, the company will cease to exist. When a founder builds a firm from the ground up, the company is not expected to function the same way when they retire.
Voluntary Liquidation Process
When a specific occurrence that is described by the board of directors happens, voluntary liquidations may begin. A liquidator is appointed in such instances.
A liquidator is a firm that liquidates its assets on its behalf. The liquidated assets are usually sold for cash or other equivalents on the open market. Liquidators have the legal authority to act on behalf of a corporation in various ways.
When a business decides to liquidate, whether voluntarily or involuntarily, it will hire a third-party liquidator to sell its assets on its behalf. Liquidators effectively have the legal ability to sell assets and effectuate a liquidation on behalf of the firm. Trustees are a term used to describe liquidators.