What is Voluntary Liquidation?

In contrast to Compulsory Liquidation, which is initiated through a court order, Voluntary Liquidation is, as the name implies, undertaken voluntarily. Either the shareholders of a company initiate voluntary proceedings or the company directors undertake them. The legal formalities differ in each case, but in either case, the services of a licensed insolvency professional will be employed.

Members? Voluntary Liquidation

In essence, Members? Voluntary Liquidation occurs when the shareholders in a company agree that they want to wind up a business in which they hold shares even though the company has enough assets to pay its debts. The company is still solvent, but for other reasons is considered to be unviable. At the winding-up hearing, a court order will be sought and when it is obtained, the insolvency practitioner will be appointed. The company directors will need to provide proof that the company is solvent and can pay off its creditors within 12 months. In some cases, they must pay these debts with interest, in others as of the time of the formal declaration of liquidation.

Should a majority of the company directors not wish to liquidate, they can petition the court. They must file their decision to dispute the shareholders?demand will be filed at Companies House and the pressure will be on the directors to prove that they have reviewed their company’s financial situation and found it to be in order.

Creditors?Voluntary Liquidation

Creditors?Voluntary Liquidation occurs when the company shareholders determine that a company in which they hold shares does not have enough assets to repay its creditors. This is the most common way that companies liquidate. In this instance, the directors and/or shareholders make the decision to liquidate. They then appoint a licensed insolvency practitioner to assess and appropriate the company assets and distribute them to its creditors.

Why would a company voluntarily liquidate?

There are three main reasons for a company to choose to liquidate. The first and most common reason is that the company is simply insolvent. It can no longer pay its debts. Secondly, a company may choose to liquidate when its shareholders and/or directors determine that the business is no longer viable. This may happen when, for instance, their product becomes outdated but they don’t have the assets to retool and compete in the marketplace. Thirdly, the directors may no longer wish to continue to trade. This can be for a variety of reasons.

Whatever the reason for Voluntary Liquidation, it is vitally important for those seeking it to employ the services of an insolvency expert before they take this step.