Voluntary liquidation is when a company’s shareholders choose to initiate the process to pay off outstanding debts, without external pressure. It can occur due to the death of the owner or to help the business continue by liquidating subsidiaries. The process varies based on the company’s size and urgency to settle debts.
A voluntary liquidation is an action that can be taken by a company’s shareholders in order to service the company’s outstanding debts. This is in contrast to involuntary liquidations, such as a Chapter 7 bankruptcy, where the competent court will order the sale of assets in order to pay off a portion of the company’s debts. With a voluntary approach to liquidation, directors and shareholders accept the process and initiate the procedure voluntarily, without any external pressure or order from a court or other entity.
There are a couple of reasons why a business may go into voluntary liquidation. In the case of small businesses, the death of the founder and owner may result in the shareholders choosing not to continue operations. In this scenario, liquidations of all major assets will begin. Once all assets are converted to cash flow and all outstanding debts are settled, the shareholders will divide the remaining assets and the company will be deemed closed.
Another example of a voluntary liquidation is actually a means of helping the business continue. Companies experiencing a period of loss may choose to liquidate subsidiaries as a means of paying off the parent company’s outstanding debts. Naturally, all debts associated with the subsidiary will also be settled and any residual liquidity used to cover the obligations of the parent company. This can sometimes be enough for the company to continue operations and hopefully start generating profits at a later date.
The exact structure for a voluntary liquidation will vary, depending on the size and complexity of the business and the urgency associated with settling outstanding debts. In many cases, company officials fill out a payment plan, along with a list of assets to sell. After the shareholders approve the plan or sale and debt settlement, the company will contact the sellers, make payment arrangements, and then provide payment if the assets are sold. This voluntary liquidation process will often take place within six to twelve months.
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