Winding up is the legal term for the process of liquidating a company or partnership when it ceases to do business or to exist. The winding up process aims to sell off assets, pay off creditors, and distribute any remaining assets to partners or shareholders. Winding up is essentially the same process as liquidating a business, that is, converting its assets to cash.
When Does Winding Up Happen?
The timing and process for winding up will be regulated to some extent by an entity’s bylaws or articles or partnership agreement. These documents will explain how and when winding up can or must happen.
The Two Types of Winding Up
There are two types of winding up, compulsory or voluntary.
Compulsory Winding Up
A court can order an entity to wind up its business. When that happens, the court will order the appointment of a liquidator or special master to manage the sale of assets and distribution of proceeds to creditors. If anything remains, the liquidator will distribute such assets to the shareholders or partners.
A suit by creditors usually causes a court order. It can also be part of the process of bankruptcy. If there are insufficient assets, the creditors will face a loss.
Voluntary Winding Up
The shareholders or partners of a business may decide to engage in a voluntary winding up by passing a board (or similar) resolution. If the company is insolvent, the shareholders may have triggered the winding up. This process allows the firm to avoid bankruptcy and personal liability for the executives.
Even if the firm is solvent, the shareholders may decide it is time to cease operations and distribute its remaining assets. Sometimes, the market will decide for them when a company faces insurmountable challenges (think buggy whip makers).
The process remains that the liquidator sells the assets, the creditors get paid, and the remaining assets are distributed to the shareholders or partners.
Speak with Our San Francisco Business Attorneys
When you have questions about your company’s legal concerns – whether you are just starting out or planning on winding up, Primum Law Group can help. Contact us for more information today.