Liquidation involves the closure of a business, in which the firm’s assets are sold out, and the amount raised is distributed to settle liabilities and obligations. Liquidation in India is typically accompanied by an inability of a company to pay its dues or the company itself when it wishes to dissolve its operations. The key legal provisions regarding liquidation are provided by the Insolvency and Bankruptcy Code of 2016, as well as the Companies Act of 2013.
The article clarifies the liquidation process procedure of an Indian company along with its legal framework and steps taken, with implications being the conclusion.
Understanding Liquidation
Liquidation, also known as winding up, is the process by which a business dissolves, realises its assets and distributes the money to the shareholders. Liquidation is used as a tool to close the company and clear its financial obligations on the balance sheet in an orderly manner.
Types of Liquidation
- Voluntary Liquidation- The process of winding up a company voluntarily is known as voluntary liquidation. It can further be divided into two sub-types: members’ voluntary liquidation and creditors’ voluntary liquidation. It is done when the company is solvent and the directors and shareholders decide to wind up the company. It is done when the company is insolvent and cannot pay off its debts.
- Compulsory Liquidation- Such liquidation is initiated by an order of the court in a situation where the company is financially unstable, cannot pay its debts and cannot solve its problems. This process is usually carried out when a creditor, shareholder or even a regulatory authority wants that company to be wound up.
Process of Liquidation in India
The liquidation process involves several steps, whether voluntary or compulsory. Here is a detailed explanation of the process:
Voluntary Liquidation Process
1. Conditions to enter voluntary Liquidation – Some of the conditions that a company has to fulfil before it proceeds to undertake this process include the following: approval of shareholders, appointment of the liquidator and preparation of a declaration of solvency.
2. Appointment of liquidator – Upon arriving at this decision of voluntary winding up of the company, the company shall then elect a qualified person who is also licensed to act as the company’s liquidator. He manages the process of liquidation, which is closely connected to the practical steps of asset realization and distribution, together with the control of all the legal peculiarities.
3. Declaration of solvency – During the members’ voluntary liquidation, the directors of that company need to issue their declaration of solvency stating that the company was able to pay off its whole debts within a certain term of time, not normally exceeding a period of a year.
4. Meeting of creditors and shareholders – After making the declaration of solvency, creditors and shareholders are held. The liquidator shall prepare a statement of affairs that contains the nature and value of the company’s property, as well as the debts and creditors. The stakeholders also have a chance to pose their questions on the matter and also pass a resolution of voluntary liquidation.
5. Assets distribution – During this process, the liquidator acquires the company’s assets and then sells them. The income from the realization of those assets is used to pay for the debts and liabilities in accordance with the priority standard laid in the law. In the event that all the debts and liabilities have been paid, any residual amount is then subdivided among the shareholders.
The money realized from selling the assets is used to retire debts and liabilities. A creditor is paid in the following order:
- Secured Creditors- those who have a charge over the company’s assets are paid first.
- Unsecured Creditors- Other creditors are paid after the secured creditors.
- Employees and Workers- Dues paid to employees and workers are paid off.
- Shareholder- If any funds remain after clearing debts, they are distributed among shareholders.
6. Dissolution of the company – Upon the final settlement of all liabilities and completion of asset distribution, the liquidator files for dissolution of the company with the Registrar of Companies. At this point, the company ceases to exist.
Compulsory Liquidation
1. Reasons for Compulsory Liquidation – Compulsory liquidation takes place when a company fails to pay its debts and a creditor, shareholder, or regulatory body files a petition with the court. Reasons for compulsorily liquidating the company include:
- Failure to pay debt above a certain limit
- Inability to pay financial liabilities
- Persistent failure to deposit statutory documents
- Fraudulent and illegal operations
2. Initiation of Compulsory Liquidation – Compulsory liquidation process starts when the petitioner files a winding-up petition with the court. The court reviews the same and, on being satisfied, issues a winding-up order.
3. Appointed of Official Liquidator – Once the court passes a winding-up order, it appoints an Official Liquidator as liquidator. The Official Liquidator assumes control of the company’s assets and takes charge of the liquidation process under the court’s watch.
4. Statement of Affairs – The Official Liquidator produces a statement of affairs that depicts a detailed inventory of the company’s assets and liabilities as well as those creditors. The statement offers grounds for liquidation, hence guaranteeing fairness in asset distribution processes.
5. Sale of company assets – The Official Liquidator would sell the company’s assets in a reasonable manner with complete transparency and get money, which it is further obliged to use toward clearing debts and liabilities on an order of precedence that arises under the very scheme of law.
6. Meeting of Creditors – A meeting is held where their claims against the company may be presented. The Official Liquidator verifies the claim and ensures that it is part of the distribution of the assets according to the order of payment.
7. Dissolution of Company – After the process of liquidation is over, the Official Liquidator hands over a final report of the realization and distribution of its assets to the court. The court then, accepting the report, grants dissolution orders for the company that practically puts an end to the legal existence of the same.
Effect and Consequences of Company Liquidation
The moratorium under section 14 of the IBC will stand automatically withdrawn from the date when the National Company Law Tribunal (NCLT) passed a liquidation order.
As provided in Section 52 of IBC, no suit or any legal proceeding shall be instituted against the corporate debtor. A lawsuit or legal proceeding can only be instituted by the liquidator with prior approval by the Adjudicating Authority and on behalf of the corporate debtors.
Under this section, the liquidation order shall be notice of discharge to the officers, employees and workers of the corporate debtor, except when the business of the corporate debtor is being carried out during the process of company liquidation under IBC by the liquidator.
Conclusion
Liquidation in India is a very regulated process where the interest of creditors, employees, and stakeholders is well-balanced. Be it a voluntary winding up or a court process, all procedures, as provided under the IBC and Companies Act, will lead to a transparent and just process. Despite the challenges, liquidation is an orderly way of dealing with insolvency and winding up the company’s affairs responsibly.
It enables businesses to make informed decisions and, hence, further safeguards the stakeholders from possible pitfalls about the nature of such a process. With such guidance and adherence, the process of liquidation becomes less of an ordeal and turns out to be a more strategic conclusion.
References
The Companies Act, 2013 (Act No. 18 of 2013)
The Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)
