What is Voluntary Liquidation? | Push Digits Chartered Accountants

What is Voluntary Liquidation?

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Voluntary Liquidation

Liquidation is a scary word in the business world; it simply means closing down a business that has become insolvent. A business becomes insolvent whenever its liabilities end up exceeding its assets. This can happen for a number of reasons: a business may run out of capital, it could have been badly managed, or its ability to generate revenue becomes critical. Regardless of why a business becomes insolvent, the outcome is always the same.

Simply put, liquidating a company means turning all of its assets into money so that the company can pay off all of its liabilities. Company liquidation is a lot more complex than one might think. This is because there are loads of legalities involved in the process. In the UAE, a business owner needs to ensure compliance with different liquidation regulations based on the state in which their company is established.

A lot of companies hire experienced liquidators to help them in the winding-up process. Appointing a 3rd party liquidator is also compulsory in many of the liquidation cases. Hiring outside help certainly makes things easier, however, developing a good understanding of the liquidation process is also inevitable.

The most common form of liquidation is voluntary liquidation. This form of liquidation takes place when a company decides to liquidate itself. Its owners, shareholders, or parent company decide that the company is unfit to operate and should be wound up. A company can be recognized as unfit to operate for a number of reasons. Usually, a company’s management decides to undergo voluntary liquidation in order to dismantle their company in a smooth and systematic way. A company’s hierarchy is dismantled and all of its loose ends get tied up. This ensures that after the company is wound up, its owner(s) won’t have to worry about any obligations tied to that company.

Voluntary liquidation is considered to be a safer route for failing businesses. They can avoid court intervention and pay off their external creditors e.g suppliers, banks, and internal creditors e.g employees’ salaries and gratuity payments. In the UAE, voluntary liquidation also allows business owners to declare the end of their business operations under that company’s name and business license. This declaration notifies the authorities of the company shutting down and that its owners have taken care of all their responsibilities related to that business.

The UAE’s company liquidation processes are designed to ensure that a company gets clearance from all parties that had dealings with it. In most areas of the Emirates, you simply cannot liquify your business without doing so.

When a voluntary liquidation takes place, a company will conduct a meeting with its creditors and decide on a mode of payment with them. Based on the agreement, the company then begins liquidating its assets to pay off all liabilities.

Keep in mind that voluntary liquidation requires interaction with the local authorities as well. Companies have to hire a liquidator and shut-down in accordance with regulations that apply to them.

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