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Voluntary Liquidation
By Gareth Taylor16 Gareth Taylor16
The term liquidation refers to the selling of assets and other holdings to pay off debts. The term dissolution is often used with liquidation, as liquidation is usually the final stage in the closure of a company. Contrary to popular belief, not all liquidation is called for by legal compulsion and organizations can opt for voluntary liquidation. Although there are various legal alternatives to voluntary liquidation, sometimes voluntary liquidation is the only option available to a company. In a nutshell, voluntary liquidation is the process of converting a company’s assets to cash.
Voluntary liquidation is a mutual decision made by company owners/decision makers and is designed to avoid any legal complications (or when a company is being dissolved). If the liquidation is carried out to pay off debts, then the voluntary liquidation is further divided into two categories:
Solvent voluntary liquidation
If the voluntary liquidation results in sufficient cash to pay off the debts, then the liquidation is referred to as a solvent liquidation. Before any liquidation attempt, the heads of an organization meet and decide if the voluntary liquidation will yield sufficient cash to pay of the company’s debts. If the organization feels that a voluntary liquidation will keep them solvent, the company chooses to carry out the voluntary liquidation.
Insolvent voluntary liquidation
Sometimes an organization carries out liquidation irrespective of the overall cash that will be generated. A voluntary liquidation is said to be insolvent when the funds generated cannot pay existing debts. An insolvent voluntary liquidation is usually the result of a ‘cutting losses’ scenario where the heads of an organization decide to dissolve an organization irrespective of existing debts. An insolvent voluntary liquidation is also carried out when an organization is expecting compulsory liquidation orders and wishes to avoid lengthy legal processes.
In the event of an insolvent liquidation, the company creates a list of preferred creditors to decide which debts need to be paid first. For example, a company might have granted a creditor a ‘secured’ status and will ensure that secured creditors are paid back on a priority basis. Creditors can also choose legal recourse if they feel they are

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