Voluntary liquidation

By: Gareth Taylor16 Gareth Taylor16

The term liquidation refers to the selling of assets and other holdings to pay off debts. The term dissolution is often used with liquidation, as liquidation is usually the final stage in the closure of a company. Contrary to popular belief, not all liquidation is called for by legal compulsion and organizations can opt for voluntary liquidation. Although there are various legal alternatives to voluntary liquidation, sometimes voluntary liquidation is the only option available to a company. In a nutshell, voluntary liquidation is the process of converting a company’s assets to cash.
Voluntary liquidation is a mutual decision made by company owners/decision makers and is designed to avoid any legal complications (or when a company is being dissolved). If the liquidation is carried out to pay off debts, then the voluntary liquidation is further divided into two categories:
Solvent voluntary liquidation
If the voluntary liquidation results in sufficient cash to pay off the debts, then the liquidation is referred to as a solvent liquidation. Before any liquidation attempt, the heads of an organization meet and decide if the voluntary liquidation will yield sufficient cash to pay of the company’s debts. If the organization feels that a voluntary liquidation will keep them solvent, the company chooses to carry out the voluntary liquidation.
Insolvent voluntary liquidation
Sometimes an organization carries out liquidation irrespective of the overall cash that will be generated. A voluntary liquidation is said to be insolvent when the funds generated cannot pay existing debts. An insolvent voluntary liquidation is usually the result of a ‘cutting losses’ scenario where the heads of an organization decide to dissolve an organization irrespective of existing debts. An insolvent voluntary liquidation is also carried out when an organization is expecting compulsory liquidation orders and wishes to avoid lengthy legal processes.
In the event of an insolvent liquidation, the company creates a list of preferred creditors to decide which debts need to be paid first. For example, a company might have granted a creditor a ‘secured’ status and will ensure that secured creditors are paid back on a priority basis. Creditors can also choose legal recourse if they feel they are not being given proper priority in an insolvent liquidation.
Once an organization chooses to liquidate its assets, it usually holds a meeting with investors (shareholders) and creditors to explain the reasons for choosing liquidation. The meeting also allows creditors to question the company’s motives for opting for voluntary liquidation.
What is equally true of voluntary liquidation is that it is a lengthy procedure that requires internal and external audits. In addition, there are numerous legal requirements that have to be met before an organization can carry out liquidation. In fact, there are numerous organizations that specialize in helping organizations carry out voluntary liquidation. For example, an organization running retail stores will prefer hiring an organization that specializes in store sales (instead of attempting voluntary liquidation themselves). In fact, larger organizations prefer using the services of more than one organization to help them carry out voluntary liquidation.
Understanding Liquidation
Liquidation is not a cheap process. Depending on the size of the organization and the volume and value of assets, it is sometimes cheaper to simply strike a company off the register. To be ‘struck off ‘ the register an organization has to prove it is no longer conducting business, and has to provide sufficient cause for not considering liquidation. However, if an organization has considerable debts and can actually pay of the debts by liquidating assets then the only option is voluntary liquidation. In addition, the extent of liquidation and the assets that can be liquidated are left to the liquidator’s discretion and the exact assets of an organization are usually ascertained by the accounting department and external auditors (if external auditors are required).

For more information on voluntary liquidation visit www.lineshenry.co.uk/voluntary-liquidation.html

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Gareth Taylor is the author of this article on voluntary liquidation. Find more information about voluntary liquidationhere.

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