What Is Liquidation of a Company? – Overview
Liquidation, expressed simply, is the process through which a business ends its operations. The business may opt to shut down for a number of reasons, such as an unwillingness to carry on with business as usual, insolvency, and so on. Liquidation of a company refers to the process of selling a corporation’s assets to pay obligations and settle liabilities.
In the event that a business is liquidated owing to bankruptcy, the liquidator may sell the company’s assets to satisfy all outstanding debts. Any money left over after paying the creditors is distributed to the company’s shareholders. Liquidation of a company is a complicated process.
Checklist for Winding up of Company in India
- The board should be called to approve the dissolution of a firm
- It is best to appoint an official liquidator or insolvency expert
- The Income Tax Department’s NOC should be requested concurrently
- Before starting a winding up proceeding, a notification must be sent to the Insolvency and Bankruptcy Board of India (IBBI) within seven days after passing the resolution
- The entire winding up of company process shall be finished in 12 months of the start of the Winding up of a company
Benefits of Company Liquidation of Company
- Free from debts after liquidation: Directors and all other company personnel are released from all obligations to and pressure from creditors once the process of liquidation is complete.
- Avoiding legal action against the company: Directors will disregard legal action taken by the court or tribunal if the resolution is approved willingly, giving them a chance to focus on other commercial prospects.
- Comparingly low cost charged for liquidation: The charges or expenses related to the process of liquidationare fairly small because there will be fees related to the sale of assets.
- All lease agreements will be cancelled: Any lease that a corporation or other entity has signed for a set period of time will be terminated, together with all of its terms and conditions, during the process of liquidation. If a fine is due, it will be subtracted from the proceeds of the asset sale.
- Advantages for creditors: After a protracted legal struggle, creditors will benefit from the process of liquidation because they will be eligible for a default payment with relation to the proposition of credits supplied by all creditors.
Documents Required for Liquidation of a Company in India
- PAN card for the business
- Closing statement for the business’s bank account
- A notarised indemnification bond that the directors must execute
- Most recent financial statement for the business
- Accounts that include all of the company’s assets and obligations that have been reviewed by a Chartered Accountant (CA)
- Proof that at least 3/4 of the board members have approved the resolution
- Application to change the company’s name.
Modes of Winding Up of Company
There are two modes of winding up of a private limited company. As follows:
- Voluntary winding up of company: A voluntary winding up of company may be initiated by a special resolution or a resolution adopted at a general body meeting. To compel the winding up, the provisions and conditions of the Memorandum of Association (MOA) may be violated.
- Compulsory winding up of Company: To carry out the compulsory winding up of a company at the command of a tribunal or a court, a specific resolution by the directors urging a court intervention may be passed during the firm’s board meeting. Similar to this, the corporation must be forced to dissolve if any official files a petition with a court or a tribunal or if it engages in any illegal or fraudulent activity.
Regulations for Liquidation of a Company
Companies Act, 2013
The 2013 Companies Act says when a company can be shut down. Here’s when:
Section 7 & 9:
1. The company decides it with a special vote.
2. The company does acts against the sovereignty and integrity of India
3. If any hoax or mischief has been found by the tribunal
4. The company didn’t file yearly returns.
5. If the judiciary believes it to be reasonable and equitable to shut down the company
Insolvency and Bankruptcy Code, 2016
The 2016 Bankruptcy Code talks about how to shut a company. Here’s how:
Section 59: The company’s voluntary Liquidation is similar to s.271 of the companies act. In this section, the company is wound up via a special resolution passed by the board members.
Priority of Claims
When a company goes into liquidation, its assets are sold, and the proceeds are used to settle the outstanding debts and liabilities. The priority of claims determines the order in which these debts are paid. The priority typically follows a specific hierarchy, and the claims are settled in the following order:
1. Secured Creditors: Secured creditors are those who hold a charge or security interest over specific assets of the company. They have a priority claim to the proceeds from the sale of the assets that secure their debts. Common examples of secured creditors include mortgage holders and other lenders with collateral.
2. Costs and Expenses of the Winding-Up: The costs and expenses associated with the winding-up process, including legal fees, administrative expenses, and fees for insolvency practitioners, are given priority and are settled next.
3. Preferential Creditors: Preferential creditors are specific creditors who are granted priority under the law. These creditors are usually government-related claims such as unpaid taxes, employee wages and salary owed (up to a statutory limit), and certain social security contributions. In some jurisdictions, this category may also include unpaid employee pension contributions.
4. Unsecured Creditors: Unsecured creditors are those who do not hold any security or charge over the company’s assets. They are paid after secured creditors, costs, and preferential creditors. Examples of unsecured creditors are suppliers, trade creditors, and general lenders.
5. Subordinated Creditors: In some cases, certain creditors may be subordinated, meaning their claims have a lower priority than those of other creditors. Subordination can occur through contractual agreements or other legal arrangements.
6. Shareholders: Shareholders are the owners of the company, but they are the last to receive any distribution, and only if there are remaining assets after all the creditors have been paid in full.
Top Reasons for Compulsory Winding up of a Company
A legal organisation created in accordance with the Companies Act is a private limited company. Therefore, throughout its life cycle, a corporation must keep its regular compliances.
For a company that is not functioning and wants to avoid compliance obligations, the process of liquidation is used. Some of the reasons why companies may winding up is discussed below.
- The company adopts a special resolution directing the tribunal to wind up the business
- failure on the part of the company to file a required report with the registrar’s office
- failure of the company to launch its operations within a year of incorporation
- A public company’s or a private company’s number of employees has fallen below 7 or 2, respectively
- The business cannot afford to pay its debts
- The court’s decision to dissolve the company is just and equitable
- The business is unable to submit its balance sheet or annual report for five consecutive fiscal years
- The corporation violated the nation’s integrity and sovereignty.
An application for the closure of a firm must be submitted to the ministry of corporate finances within three to six months. This entire process can be done online.
If a firm doesn’t submit its compliances on time, it will be fined and penalised, and its directors will be barred from founding new companies. It is better to dissolve an inactive corporation in order to avoid future penalties or liabilities.
The Role of an Insolvency Practitioner in Company Liquidation
- Assessing the company’s ability to repay its debts
- Facilitating the sale of the company’s assets to settle liabilities
- Overseeing the liquidation proceedings in accordance with the law
- Communicating with creditors regarding the company’s financial status
- Ensuring employees’ rights and dues are appropriately addressed.
How to Close a Company in India
Winding Up
The process of winding up has to be initiated voluntarily by holding a meeting of all parties and adopting a specific resolution, or it can be prompted by a court or tribunal order.
- The MCA created the ‘Strike Off’ mechanism to provide inactive businesses the chance to have their names removed from the Register of Companies
- The Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, which set forth the procedures for winding up or closing a private limited company in accordance with the Companies Act of 2013, were published by the MCA on 27 December 2016
- The Ministry of Corporate Affairs has implemented Sections 248–252 of the 2013 Act by releasing the STK 2 form.
Fast Track Exit
This technique was introduced through the Companies Act of 2013’s under Section 248 and was reactivated on 5 April 2017, has become the most used. Fast Track exit can be done in two ways:
1. Suo Moto by Registrar
2. The registrar has the authority to remove the Company’s name on its own if:
- The company failed to start any business within a year of incorporation, and it hasn’t sought the status of a dormant company. Company despite not conducting any business or engaging in any activity for the previous two fiscal years.
Consequences of Winding up a Company
We’re discussing the five effects of closing a business today. After a company is declared insolvent, a liquidator is appointed to auction off the company’s assets. The appointment of a liquidator has a number of effects. We’ll talk about five of those repercussions today.
You Lose Control: The first repercussion is the most evident, but you must comprehend it before continuing down this road. You no longer have any control over the firm or its assets once a liquidator has been appointed.
The Directors Loose Power: Even though they still have that title, the directors are no longer in charge. Once the liquidator has control, the directors are unable to affect the company’s course.
To Pay off Debts, All of the Assets Will Be Sold: If a liquidator needs to be appointed, it means that the company is bankrupt and unable to pay its debts. The primary duty of a liquidator is to repay as much of that debt as is practicable.
Personal Guarantees May Still Be Due From the Directors: Any debts incurred by the firm that have been personally guaranteed by a director or another employee of the company must still be repaid. The personally guaranteed debt is not discharged by a company’s bankruptcy.
You Might Be Prohibited From Practising Your Occupation by Government Regulations: You are prohibited from working in that field for three years if your company filed for bankruptcy in a specified trade, such as construction. You must be aware of the regulations before filing for bankruptcy because they vary by industry.
Sequence of Claim
- The costs incurred during the bankruptcy process, such as those for an attorney, liquidator, and other professionals involved in insolvency
- Debts owed to secured creditors, such as banks and financial organisations, as well as employee salaries Salaries and unpaid dues of the employees 24 months prior to the start of the liquidation process 12 months prior to the liquidation process
- Any sum owing to the consolidated fund of India/state, the central government, or the state government
- Every other outstanding bill.
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.
