UNDERSTANDING VOLUNTARY LIQUIDATION



Voluntary liquidation sounds a bit intimidating, and that's likely why you're reading this article; to find out more about what it actually is. Voluntary Liquidation is not to be confused with involuntary liquidation in which an outside authority (such as a court) orders a company to liquidate its assets. With voluntary liquidation, a company or individual willingly decides to sell off its assets in order to cover its debts as well as pay any profits from that sale to its shareholders.

While this is written in the context of a company, the principles apply to an individual as well.

There are a variety of reasons as to why a voluntary liquidation would be undertaken. If key members of a company either leave or die and shareholders of the company decided not to continue operations, they may decide that selling off the company's assets would be preferable, rather than trying to replace the lost members of their team.

Another reason that a company would decide to undergo voluntary liquidation is to free up funds for the entire company's use. Such cases usually involve a larger company selling off the assets of one of its subsidiary companies.

A more creditor favourable reason that companies opt to go through a VL is after consulting with a insolvency professional, they come to the understanding that they will not be able to pay off all of their creditors. After having such a realization, rather than declaring bankruptcy, they would go through a Voluntary Liquidation and work out a deal with their creditors in order to pay a percentage of their overall debt. By going through this process not only do they save time, as declaring bankruptcy and going through the court system is a very time consuming task, they save money.  

The first step in declaring a Voluntary Liquidation is the passing of a resolution stating as much. After such a resolution has been passed and approved, the company usually ceases doing business.

In the case of an individual, you will not be able to obtain credit for a period of years, dependent on current legislation, and will have to prove yourself rehabilitated.

If the company was profitable at the beginning of this process (and at least five weeks prior) a majority of the company's directors put through a motion called a statutory declaration of solvency, then the VL will be put through as a member's voluntary windup of company business.

If on the other hand a company is insolvent at the beginning of this overall process, or in the rare case a statutory declaration of solvency was not put through, then the VL will be processed as a creditor's voluntary windup of company business.

When a creditor's voluntary windup is declared, a meeting with all of the company's creditors is scheduled. In this meeting, all of the plans of the business are discussed as well as how the distribution of the profits from the sold assets are to be handled. If a consensus cannot be achieved at that meeting, a council of creditors, called a liquidation committee, may be appointed to better decide how the liquidation process would be handled.

By reading this article you should have a more complete understanding of what voluntary liquidation actually means, and what a company has to go through in order for this process to be completed.

As always, if you have any questions do not hesitate to contact us - we will happily obtain a professional opinion or answer to your query. Prior to taking any rash steps - always consult proper legal advice.


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