Liquidity is a process by which a business winds down its activities and sells off all its assets, and the proceeds are returned to creditors or original investors. Liquidation may be voluntary or involuntary. The latter occurs usually when the business fails, while the former could be for a number of reasons. This article provides a brief primer on understanding the voluntary liquidation process.
As mentioned above, voluntary liquidation of a business could occur for a number of reasons, other than just paying off creditors, though this is the most-prevalent reason. Other reasons for voluntary liquidation can include:
- A failing or not very successful business, though not at the stage of involuntary liquidation yet.
- Owners and/or partners want to dissolve the business and go their separate ways.
- Proprietor wants to retire and has no family or heirs to bequeath the business to, and not interested in selling to a third party.
- Urgent requirements for liquid cash and the business is the only asset.
The voluntary liquidation or dissolution of business is meant to be carried out as per the laws in place, at a country, state or county level. In the US, company law is a matter left to individual states to regulate; therefore you will need to check your respective state’s laws and regulations with respect to voluntary liquidation. Voluntary liquidation can also be for the whole or part of the business.
Voluntary liquidation process
- The decision to voluntarily liquidate a company will depend on the legal identity of that company or business. For a proprietorship, the decision is taken by the proprietor and no other agreements or approvals are necessary. For a partnership or a limited company, consent of all partners or members of the company is required to initiate the liquidation process. For a limited company, a resolution is required.
- if the business is solvent at the time of winding-up, the board will need to make a legal declaration to that effect and then pass a resolution to appoint a liquidator to oversee the process.
- If there is an issue on the solvency, then the creditors of the business are allowed to petition for a creditor's voluntary liquidation, the company is required to call for a meeting of all creditors of the business, with the board of directors or partners.
- The current status of the business/company must be disclosed in full and the creditors can choose to appoint a single or team of liquidators to oversee and finalize the process.
- All assets and liabilities of the business are identified and valued, the assets are then put on sale and the proceeds received are directed towards paying-off creditors, suppliers and employees, the amounts due to them.
- If there are any left-over amounts after all debts and obligations are satisfied, then the money is divided amongst the partners/members of the business as per the percentage of initial investments.
This, in very simple steps is the way the process of voluntary liquidation works and readers of this article should have a fair understanding of this process.