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In a voluntary liquidation, the company’s owners decide how to liquidate its assets and how to disburse the funds to its creditors, usually without the involvement of a court.
Companies may decide to liquidate for several reasons, including the sale of a company following the death of an owner. In this case, once assets are liquidated and outstanding debts are satisfied, the remaining assets are divided among the company’s shareholders.
In some cases, a company may choose to voluntarily liquidate its holdings to enable it to operate more cost-effectively and/or efficiently, or even to allow it to remain in business. For instance, a large corporation with multiple smaller business entities may decide to sell off one or more of those subsidiaries to enable the corporation to remain in business or become more profitable.
Voluntary liquidation may also occur when a lender declares default on a loan due and has filed a lawsuit or secured a judgment against the company or when the lender has begun foreclosure proceedings. The company may choose to sell off its assets to satisfy the debt before the lender can do so. While this is technically a voluntary liquidation, it is in response to actions taken by the company’s lender; therefore, it’s often referred to as a forced-but-voluntary liquidation.
Involuntary liquidation occurs when creditors force the company to sell off its assets without its consent. This is usually done through the bankruptcy court or through a judicial sale process, like a foreclosure. Involuntary bankruptcy is also regulated under federal bankruptcy laws, and it can only occur when certain requirements are met, such as:
* This amount is adjusted every three years under the bankruptcy code with the next adjustment due in April 2016.
An involuntary liquidation differs from voluntary liquidation in several important ways: