There are various reasons why a business may choose to undergo voluntary liquidation, ranging from financial difficulties and business restructuring to owner’s retirement or exit strategy, and the completion of a specific business objective.
This process involves legal requirements and careful planning, and may be undertaken through different types of voluntary liquidation, such as members’ voluntary liquidation (MVL) or creditors’ voluntary liquidation (CVL).
In this article, we will explore some of the common reasons why a business might opt for voluntary liquidation and highlight the importance of professional advice and compliance with relevant laws and regulations in this process
Reasons why a company may undergo voluntary liquidation
Here are 20 examples and reasons for a voluntary liquidation:
- Financial difficulties:
- Inability to pay debts or meet financial obligations.
- Declining revenues and increasing losses.
- Exhausted funding options and lack of capital to sustain operations.
- Business restructuring:
- Mergers or acquisitions where the decision is made to liquidate certain subsidiaries or divisions.
- Change in business direction or strategy, resulting in the need to wind up certain operations.
- Owner’s retirement or exit strategy:
- Business owner’s decision to retire and liquidate the business as part of their exit plan.
- Business owner’s desire to pursue other opportunities and close down the current business.
- Completion of a specific business objective:
- Winding up a project or a specific business venture that has been completed.
- Liquidation of a subsidiary or branch that is no longer viable or aligned with the company’s goals.
- Insolvency:
- Inability to pay creditors and meet financial obligations.
- Legal requirements to liquidate the company due to insolvency.
- Business dissolution due to partnership disputes:
- Irreconcilable differences between partners leading to a decision to dissolve the business and liquidate its assets.
- Retirement or death of a key business owner:
- Retirement or death of a key business owner resulting in the decision to liquidate the business.
- Compliance with legal requirements:
- Legal requirements to liquidate the company due to violation of laws or regulations.
- Dissolution of a company that has completed its intended purpose or term as per legal requirements.
- Tax considerations:
- Utilisation of tax benefits associated with voluntary liquidation, such as capital gains tax savings.
- Strategic liquidation to minimize tax liabilities or take advantage of tax planning opportunities.
- Strategic restructuring:
- Streamlining operations and assets by liquidating non-core businesses or underperforming assets.
- Consolidating resources and focusing on core competencies through liquidation of non-essential operations.
- Exit from a declining industry:
- Exiting a declining industry or market segment by liquidating the business and realizing the remaining value of assets.
- Succession planning:
- Planned liquidation of the business to facilitate smooth succession to the next generation or new management.
- Transitioning ownership and control of the business through voluntary liquidation.
- Business consolidation:
- Merging multiple businesses into a single entity by liquidating some of the existing businesses.
- Consolidating operations and assets of subsidiary companies into the parent company through voluntary liquidation.
- Shareholder agreement:
- Agreement among shareholders to dissolve the company and liquidate its assets.
- Liquidation of the business as per the terms and conditions specified in the shareholder agreement.
- Exit from a non-profitable venture:
- Decision to exit from a non-profitable venture or project by liquidating the business and realizing the remaining value of assets.
- Bankruptcy:
- Business entering into bankruptcy proceedings, resulting in the liquidation of assets to repay creditors.
- Court-mandated liquidation of assets as part of bankruptcy proceedings.
- Business winding up after completion of a joint venture:
- Winding up of a joint venture or partnership after the completion of the agreed-upon venture or project.
- Change in regulatory environment:
- Change in regulatory environment resulting in the need to liquidate the business due to non-compliance or inability to meet new regulatory requirements.
- Retirement or departure of a key employee:
- Retirement or departure of a key employee, such as the founder or CEO, leading to the decision to liquidate the business.
- Business consolidation for strategic realignment:
- Strategic realignment of the company’s operations or portfolio, resulting in the decision to liquidate certain assets
Reasons why a company may opt for a members voluntary liquidation
Here are 20 examples and reasons for a members voluntary liquidation:
- Retirement of business owners:
- Business owners reaching retirement age and deciding to wind up the company and liquidate its assets as part of their retirement plan.
- Distribution of surplus assets:
- Distribution of surplus assets among shareholders after the company has achieved its business objectives or completed a specific project.
- Realisation of shareholder value:
- Shareholders seeking to realize the value of their shares by winding up the company and distributing its assets.
- Exit strategy for shareholders:
- Shareholders seeking to exit the company and liquidate their investment for various reasons, such as changes in personal circumstances or investment objectives.
- Simplification of corporate structure:
- Simplification of a complex corporate structure by liquidating subsidiary companies through MVL to consolidate operations and assets.
- Succession planning:
- Planned liquidation of the company to facilitate a smooth transition of ownership and management to the next generation or new management.
- Resolution of disputes among shareholders:
- Resolving disputes among shareholders by winding up the company and distributing its assets in accordance with the agreed-upon terms.
- Completion of a business venture:
- Winding up of the company after the completion of a specific business venture or project for which it was formed.
- Exit from a non-profitable venture:
- Decision to exit from a non-profitable venture or business line by liquidating the company and realizing the remaining value of assets.
- Tax considerations:
- Utilisation of tax benefits associated with MVL, such as capital gains tax savings for shareholders.
- Retirement or departure of a key employee:
- Retirement or departure of a key employee, such as the founder or CEO, leading to the decision to liquidate the company.
- Change in business direction or strategy:
- Change in business direction or strategy that requires winding up the company and liquidating its assets to pursue new opportunities.
- Distributing surplus cash or investments:
- Distributing surplus cash or investments to shareholders by liquidating the company and realizing the value of such assets.
- Return of capital to shareholders:
- Returning capital to shareholders by winding up the company and distributing its assets, especially in cases where the business has surplus cash or assets.
- Resolution of financial difficulties:
- Resolving financial difficulties of the company by winding up and liquidating its assets to repay creditors and shareholders.
- Completion of a joint venture or partnership:
- Winding up of a joint venture or partnership after the completion of the agreed-upon venture or project.
- Business consolidation:
- Merging multiple businesses into a single entity by liquidating some of the existing businesses through MVL.
- Change in regulatory environment:
- Change in regulatory environment resulting in the need to wind up the company and liquidate its assets due to non-compliance or inability to meet new regulatory requirements.
- Distributing accumulated profits:
- Distributing accumulated profits or reserves to shareholders by winding up the company and realizing the value of such profits or reserves.
- Shareholder agreement:
- Agreement among shareholders to wind up the company and distribute its assets as per the terms and conditions specified in the shareholder agreement
Frequently asked questions
A company may go into voluntary liquidation for reasons such as retirement of owners, distribution of surplus assets, realization of shareholder value, simplification of corporate structure, succession planning, resolution of disputes among shareholders, completion of a business venture, exit from non-profitable ventures, tax considerations, departure of key employees, change in business direction, distribution of surplus cash or investments, return of capital to shareholders, resolution of financial difficulties, completion of joint ventures or partnerships, business consolidation, changes in regulatory environment, distribution of accumulated profits, and as per shareholder agreements.
The 4 causes of liquidation are: The business cannot pay its debts as and when they fall due. Liabilities exceed total assets. The business is making losses and there are minimal prospects to turn it around. The directors are finding it hard to cope with the stress and pressure of trading.
The two conditions for voluntary liquidation are: The company may have received a winding up petition or statutory demand from a trade creditor. Unable to pay its debts, it therefore wishes to place the company into a Creditors Voluntary Liquidation rather than a Compulsory Liquidation. Why would a company go into voluntary liquidation?
What are the 4 causes of liquidation?
What are the two conditions for voluntary liquidation?
Conclusion
In conclusion, voluntary liquidation is a strategic decision that a company may choose to pursue for various reasons. Whether it’s for retiring owners, distribution of surplus assets, realization of shareholder value, or simplification of corporate structure, voluntary liquidation can be a viable option to wind up a company’s affairs and distribute its assets.
It can also be used as part of succession planning, to resolve disputes among shareholders, or to exit from non-profitable ventures. Tax considerations, changes in business direction, regulatory changes, and distribution of accumulated profits are also some factors that may lead a company to opt for voluntary liquidation. Ultimately, the decision to go into voluntary liquidation should be carefully considered, taking into account the specific circumstances and objectives of the company and its shareholders.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.