What is the difference between compulsory and voluntary liquidation?

Liquidation is the process where a firm's assets and liabilities are terminated, realized and subsequently distributed. In many cases, the firm ceases to exist. The liquidation process is sometimes voluntarily initiated by members of the firm. Other times it is compelled by a creditor's petition to the courts for failure to uphold contractual payments.

Voluntary liquidation actually falls into two subcategories: those with a declaration of solvency and those without. An otherwise solvent company might determine that, through liquidation, it is able to pay its debts within a specified period. Its directors can then issue a formal declaration of solvency and its shareholders can lead the appointment of a liquidator. This is sometimes called a '"members' voluntary liquidation." Shareholders may elect to initiate a liquidation without the directors having issued a declaration. In these cases, the liquidator is appointed by the company's unsecured creditors, not the shareholders.

If a delinquent company does not voluntarily wind down, its creditors can present a petition to a court to force liquidation. These petitions may also be presented by the company, its directors or others affected by its balance sheet, although these cases are more rare. Most often, an unsecured creditor initiates a compulsory liquidation process. The court then determines if assets should be sold off to repay creditors.

Compulsory business liquidation is different than "forced liquidation" by a brokerage house. A forced liquidation involves a delinquent customer whose positions are involuntarily closed to reduce exposure and meet legal margin requirements.