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A voluntary liquidation is an action that may be taken by shareholders of a company in order to honor the outstanding debts of the corporation. This is in contrast to involuntary liquidations, such as a Chapter 7 bankruptcy, where the court of jurisdiction will order the sale of assets in order to settle a portion of the debts of the company. With a voluntary approach to liquidation, the directors and shareholders agree to the process and initiate the procedure willingly, with no outside pressure or order from a court or other entity.
There are a couple of reasons why a company may undergo a voluntary liquidation. In the case of small businesses, the death of the founder and owner may result in any shareholders choosing to not continue operations. In this scenario, liquidations of all major assets will commence. 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 considered closed.
Another example of voluntary liquidation is actually a means of helping the company to continue. Corporations that are encountering a period of loss may choose to liquidate subsidiary companies as a means of settling outstanding debts of the parent company. Of course, all indebtedness connected with the subsidiary will also be settled, and any remaining cash used to cover the obligations of the parent. This can sometimes be sufficient to allow the corporation to continue operations and hopefully begin to turn a profit at a later date.
The exact structure for a voluntary liquidation will vary, depending on the size and complexity of the company, and the urgency associated with settling outstanding debts. In many cases, a schedule of payment is compiled by company officers, along with a list of assets to be sold. After the shareholders approve of the plan or sale and settlement of debts, the company will contact vendors, make payment arrangements and then provide payment as the assets are sold off. This process for voluntary liquidation will often take place within a six to twelve month period.
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