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Winding Up: Definition & Meaning

Updated: November 18, 2022

When a business faces insurmountable challenges, it may take the tough decision to cease business operations and start the process of winding up. 

It can also have that decision thrust upon it by a court of law or through creditors. 

This is what is known as winding up.

Read on as we learn more about this process and how it differs from liquidation.

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    KEY TAKEAWAYS

    • Winding up is the process of shutting down business operations and liquidating assets. 
    • The only aim of winding up is asset sales and paying off creditors. 
    • Any remaining assets are distributed to the owners and shareholders. 
    • There are two main types of winding up – compulsory and voluntary. 

    What Is Winding Up?

    Winding up is the term used to describe the process of liquidating a company. While a company is winding up, it will cease to do its day-to-day business activities as usual. The main purpose of winding up is to liquidate and sell off stock and pay off any creditors. It also involves distributing any remaining assets to shareholders or to partners. 

    The term winding up goes hand in hand with liquidation. As liquidation is the process of converting assets to cash.

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    How Winding Up Works?

    The winding up process is a legal process. It is regulated by a series of corporate laws as well as what’s known as a company’s ‘articles of association’ or a partnership agreement. Winding up can either be voluntary or compulsory, and it can apply to both privately held and publicly held companies. 

    If you don’t legally dissolve a business, then you can incur penalty fees and a number of different tax consequences. These fees and taxes can be incurred even if your business isn’t currently operating or earning any income or revenue. When a business has made the decision to no longer operate and it has wound up its daily operations, then it legally must dissolve. 

    Types of Winding Up

    There are two types of winding up:

    • Compulsory winding up
    • Voluntary winding up

    Let’s take a closer look at both of these types of winding up. 

    Compulsory Winding Up

    A company can be forced by law to wind up its business operations. This can be decided in a court of law and come in the form of a court order. 

    In these cases, the company would be ordered to appoint a liquidator. This liquidator would be in charge of managing the sale of the company’s assets and the distribution of the proceeds to the creditors. 

    A court order is commonly triggered by a suit that is brought by the creditors of the company. The creditors are often the first to realize and accept that a company has become insolvent, mostly because their bills will remain unpaid. 

    In other cases, the winding up process is the final conclusion of a bankruptcy proceeding. This can involve creditors trying to recoup a portion of the money that they are owed by the company. 

    In either case, a company may not have a sufficient amount of assets in order to satisfy the entirety of its debt. This would lead the creditors to face an economic loss. 

    Voluntary Winding Up

    The second type of winding up is voluntary. This is where a company’s partners or shareholders trigger a voluntary winding up process. This is usually done through the passage of a resolution. 

    If the company has become insolvent, then the shareholders can trigger a winding up. This is to avoid the company going into bankruptcy, and in comes personal liability for the debts of the company. 

    Even if the company is insolvent, the shareholders may feel that their objectives have been achieved. This would lead them to cease all business activities and operations and start distributing the company’s assets. 

    In other cases, the market situations may point to an unfavorable situation for the company. If the stakeholders decide that the company is on the verge of facing insurmountable challenges, then they may call for a resolution. This would be to wind up the business.

    A subsidiary may also be wound up. This would normally be because of its diminishing prospects. It can also be through an inadequate contribution to the parent company’s profit or its bottom line. 

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    Real-Life Example of Winding Up

    Blockbuster LLC is a good example of a company that wound up its business operations. 

    Blockbuster was a popular American-based provider of home movie and video game rental services. They operated out of a number of brick-and-mortar stores across the world. At its very peak in 2004, Blockbuster had 9,094 stores around the world and employed roughly 84,300 people. 

    Due to a number of reasons, including poor leadership, the Great Recession, and growing competition, Blockbuster filed for bankruptcy protection in 2010 and went out of business in 2014. This effectively started the winding up process. 

    In 2011, Blockbuster sold 1,700 of its remaining stores to a satellite television provider. And in 2014 they closed the last 300 company-owned stores, therefore finishing up the winding up process. 

    Some other well-known examples of American companies that were liquidated, or wound up, include:

    • Borders group
    • Payless
    • Circuit City
    • RadioShack

    How Long Does It Take to Wind Up a Business?

    There are a number of steps to take when winding up a business. A reasonable time to take would be roughly between two or three months for the company to enter the liquidation process – depending on the size of the business. 

    From that point, the liquidation process can last anywhere from a few months to over a year. This is completely dependent on how long the business takes to sell off all of its assets. 

    Summary

    When a business or company winds up, its operations are stopped and its assets are liquidated or sold. There are two different ways to wind up. It can either be done voluntarily by the stockholders or compulsory by the creditors.

    Winding up is an important term for business owners to understand. There are a number of legal processes that need to be followed in order to properly wind up a business, so making sure you follow these rules is vital.

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    FAQs About Winding Up

    What Is the Difference Between Winding up and Liquidation?

    Winding up is the process of ending all business affairs. It includes the closure of the company and the liquidation or dissolution of the business assets. Liquidation is specifically about selling off company assets in order to pay creditors.

    Who Can Apply for Winding Up?

    Winding up can be petitioned for by:

    • Creditors
    • Company directors
    • Shareholders

    What Are the Modes of Winding Up?

    There are two modes of winding up. They are voluntary winding up, and compulsory winding up. 

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