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A voluntary liquidation is an action that can be taken by a company’s shareholders to honor the company’s outstanding debts. This is in contrast to involuntary liquidations such as Chapter 7 bankruptcy, where the court of jurisdiction will order the sale of assets to pay off a portion of the company’s debts. With a voluntary liquidation approach, directors and shareholders agree to the process and initiate the procedure voluntarily, without external pressure or orders from a court or other entity.
There are a few reasons why a company may be subject to voluntary liquidation. In the case of small businesses, the death of the founder and owner may cause shareholders to opt out of continuing 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 remaining assets will be divided by shareholders and the company will be considered closed.
Another example of voluntary liquidation is actually a means to help the business continue. Companies that are experiencing a period of loss may choose to liquidate subsidiaries as a means of settling outstanding debts of the parent company. Of course, all debts related to the subsidiary will also be canceled and the remaining cash will be used to cover the obligations of the parent. Sometimes this may be enough to allow the business to continue operations and hopefully start making a profit later on.
The exact structure of a voluntary liquidation varies depending on the size and complexity of the business and the urgency associated with settling outstanding debts. In many cases, company directors compile a payment schedule, along with a list of assets to be sold. After shareholders approve the plan or sale and debt settlement, the company will contact vendors, make payment arrangements, and then make payment as the assets are sold. This voluntary liquidation process usually takes place over a period of six to twelve months.