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Overview of Liquidation of Company

Liquidation is a formal procedure through which the company can end its operations. In the process of Liquidation, the company will sell off its assets in order to repay the liabilities. In case there is some positive balance left then it shall be distributed equally amongst the shareholders. In simple words, Liquidation is known as the dissolution or winding up of the company.

Types of the Liquidation

There are three types of the liquidation process

  • Voluntary Liquidation: Under Voluntary Liquidation the company is not forced to carry out the insolvency process; instead the owners of the company voluntarily decide to shut down its operations. In voluntary Liquidation, the company is able to pay back its creditors.
  • Creditor's Voluntary Liquidation: This type of Liquidation is initiated by the directors or shareholders of the company when they believe that the company might default on its creditors. The company will pay all the creditors and won’t be part of a court-initiated insolvency process.
  • Compulsory Liquidation: The court or any adjudicating authority shall order the company to end its operations and shut down the company as it fails to pay off its liabilities.

Regulations for Liquidation of a company

  • Companies Act, 2013

Section 271 states that the company can be wound up through a petition on 

  1. If the company passes a special resolution
  2. If the company acts against the sovereignty and integrity of India
  3. If any fraud or misconduct has been found by the tribunal
  4. If any default has been made in filing the annual returns
  5. If the tribunal believes it to be just and equitable to shut down the company
  • Insolvency and Bankruptcy Code, 2016
    1. Section 7 & 9: Financial Creditors and operational creditors can initiate the process for Corporate Insolvency process, also known as (CIRP). This section deals with the compulsory Liquidation of the company.
    2. Section 59: this section deals with the voluntary Liquidation of the company; this is similar to s.271 of the companies act. In this section, the company is wound up through a special resolution passed by the board members.

Sequence of Claims

The sequence of claims shall be as follows:

  • The expenses that have been incurred during the bankruptcy process, such as insolvency professional, advocate, liquidator's fee etc.
  • Debts that are owed to the secured creditors like banks and financial institutions; and employees' dues 24 months prior to the commencement of Liquidation
  • Wages and unpaid dues of the employees 12 months before the liquidation process
  • Any amount due to the Central government, state government, or Consolidated fund of India/ state.
  • All other remaining debts.

Authorities involved in the Liquidation of a Company

  • NCLT- National Company Law Tribunal.
  • NCLAT- National Company Law Appellate Tribunal.
  • IBI- Insolvency and Bankruptcy Board of India.
  • MCA- Ministry of Corporate Affairs.

Documents Required

The following documents are required for the Liquidation of the company:

  • Bank account statements of the company
  • PAN card for the business
  • An indemnification bond executed by the directors
  • Financial Statements of the Company
  • Documents of All Assets and liabilities reviewed by a Chartered Accountant
  • Documents for Approval of resolution of board members (if Applicable)
  • NOC from the income tax department
  • Any other relevant documentation related to the company.

Procedure for Liquidation of the Company

The process of Liquidation of the company is as follows:

  • Process for Compulsory Liquidation
  1. Application to the tribunal: An application for insolvency can be initiated by the Financial creditors or Operational creditors. This is done to ensure that the company enters into the corporate insolvency resolution process. The applicant must ensure that the default must be of an amount which is more than 1 Lakh rupees.
  1. Appointment of IRP: once the application is admitted by the tribunal then, an interim insolvency resolution professional (IRP) shall be appointed. The IRP shall take over the management of the company.
  1. Moratorium period: after the appointment of IRP, a moratorium will be imposed on the company, which means that all the operations of the company shall be stopped. No transfer of assets or goods and services shall take place. This shall continue till the time till the entire corporate insolvency resolution is not completed.
  1. Verification of claims: The interim resolution professional shall go through and check the claims made by the creditors within a span of 30 days; he shall prepare a list and present them to the committee of creditors.
  1. Resolution professional: The committee of creditors may appoint a new resolution professional or continue with the same person who was the interim resolution professional.
  1. Resolution plan: The resolution professional will formulate a resolution plan which specifies the conditions on how each of the creditors shall be paid back. The committee of creditors have 180 to approve this plan.
  1. Sanction of NCLT: The resolution plan when finalised, must be sanctioned by the NCLT. All the necessary formalities and permits have to be completed by the resolution professional within the next one year after Approval from NCLT.
  1. Liquidation of the company: if the above-mentioned steps are completed then the NCLT needs to permit the Liquidation of the company and pay back its debtors.
  • Process for Voluntary Liquidation
  1. Declaration: The directors of the company must declare that the company is solvent through an affidavit. The affidavit must mention that the company has not committed any default, this step is not being done to defraud anyone and it can repay its debtors.
  1. Meeting of the board of directors: The directors are responsible for the Approval of the liquidation process. They must decide who shall be appointed as a liquidator and prepare a statement for the general meeting stating the reasons for Liquidation.
  1. General meeting of shareholders: The general meeting must be held within four weeks of the declaration of solvency. The Liquidation of the company must be passed by a special resolution and the decision of the appointment of a liquidator must also be finalised.
  1. Responsibilities of Liquidator: The Liquidator will make a public announcement through an English and regional newspaper regarding the winding up of the company, this is done to invite claims of various stakeholders. The liquidator shall then assess and finalise the list of all the claims. The liquidator shall realise all the assets so that all the stakeholders can be paid off.
  1. Liquidation of the company: The Liquidation of the company must be completed within 12 months from the start of the process of Liquidation. The liquidator shall prepare a final report with all the details of the settlements. This report shall be submitted to the registrar of the company and IBBI.
  1. Application to NCLT: When the above-mentioned steps are completed, an application has to be made to the NCLT for the dissolution of the company. When the NCLT passes an order to dissolve the company the company will cease to operate from the date of that order.

Frequently Asked Questions

The liquidation process can be carried out by any corporate person (voluntary Liquidation) or by creditors (involuntary Liquidation).

No, a business shall cease to operate during the process of Liquidation as its assets shall be put on a moratorium.

The process of Liquidation must be completed within a period of 12 months from the date the process of Liquidation had started.

The company can initiate the process of Liquidation when the company is insolvent, if the company goes bankrupt or if the owners do not want to continue with the business.

The employees can claim their unpaid dues such as salaries and allowances. If the company is unable to pay them due to a shortage of funds they can approach the national insurance fund for their payments.

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