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What are the Three Types of Liquidation?

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The act of liquidation, whether instigated willingly by company leaders or compelled by external factors, entails the systematic closure of a business and the equitable distribution of its assets among creditors and shareholders. The primary objective is to facilitate a fair settlement of debts, ensuring impartial allotment of remaining assets to creditors and a portion allocated to shareholders. This overview delves into the fundamentals of equitable asset distribution, exploring the various types of liquidation and the mechanisms that set them in motion.

Kanakkupillai makes the liquidation process more accessible by offering full legal representation and ensuring that all relevant information is always available. The lawyers at Kanakkupillai ensure the procedure is quick and affordable, considering people’s limited resources and simplifying the difficulties involved with liquidation.

Voluntary Liquidation

When a company’s board or shareholders decide to shut it down, whether or not it will remain viable, the business goes through voluntary liquidation. Its assets are sold, and the proceeds are divided between creditors and investors. Using this tactic, the company guarantees that its debts will be paid in full and any outstanding obligations will be cleared. A corporation’s objectives to enter voluntary liquidation are to settle existing debts, give up any remaining assets to stakeholders, and end business operations in a controlled and organised way. Whether the business is doing well financially or is having problems, voluntary liquidation offers a systematic means to close down while meeting all financial and legal requirements.

An ordinary resolution or a special resolution may be employed to initiate a voluntary liquidation:

  • Ordinary Resolution: If a preset event indicated in the articles of association occurs or the company’s stipulated duration as outlined in the articles ends, voluntary liquidation may occur.
  • Special Resolution: As an alternative, the company’s members may voluntarily dissolve the business by passing a special resolution. Members of the company must approve this, and the resolution must be made public. Public announcements are usually made through newspaper and official Gazette advertising.

In conclusion, the firm may choose to enter voluntary liquidation by passing a special resolution requiring public disclosure or by reaching the end of a defined period or the occurrence of a predetermined event (ordinary resolution).

Types of Liquidation

Here are the primary types of liquidation:

1. Member’s Voluntary Liquidation (MVL):

MVL gives a corporation a year to liquidate its assets and pay off its debts, with a liquidator overseeing the proceedings. After evaluating the company’s financial status, directors approved a resolution addressing solvency. The objectives are fair asset allocation, timely debt settlement, and systematic business closure.

2. Creditor’s Voluntary Liquidation (CVL):

  • Used by companies unable to pay debts, creditors vote on winding down the business in CVL.
  • Unlike MVL, CVL is for solvent and insolvent companies, addressing financial difficulties with creditor involvement.

3. Compulsory / Forced Liquidation:

  • This legal process occurs when a business is ordered to close and sell assets to repay debts.
  • Initiated by the government, the company, or a creditor, a liquidator oversees asset sale and debt repayment.
  • Shareholders may receive remaining assets after creditor payment, but insufficient profits might limit investor reimbursement.
  • The specific procedure for a smooth liquidation depends on the country’s legal framework.

Documents required for a Company’s Liquidation in India

A firm needs to have certain documents to start the liquidation process. These documents include:

  • Permanent Account Number
  • Official resolution from the board of directors
  • Copy of the company’s memorandum and articles of association
  • List of creditors with their claims
  • An inventory detailing assets and debts
  • An overview of the company’s activities, 
  • Financial statement
  • Report from the company’s auditor. 

These records are essential for maintaining openness, giving information about the company’s financial situation, and thoroughly explaining its activities. The board of directors must formally approve the start of the winding-up action, and the articles of association and the company’s memorandum are essential to the liquidation process. The auditor’s report further facilitates the fair evaluation of the organisation’s financial components.

These documents are essential to enabling an open and knowledgeable liquidation procedure under the Insolvency and Bankruptcy Code’s legal framework.

Conclusion

Ensuring the fair and systematic distribution of the company’s assets among its creditors and owners is the main goal of any liquidation. The exact form of liquidation and the legal system in the company’s jurisdiction determine the procedural nuances of the process. For this reason, getting professional help—like that offered by Kanakkupillai—may be necessary to get through the process successfully. For all your company liquidation needs, Kanakkupillai provides easily accessible and reasonably priced online counsel, guaranteeing a seamless and trouble-free experience. For complete support that will make the liquidation process effective and stress-free, contact Kanakkupillai.

Divya

Telecom engineer turned content creator with a knack for crafting compelling narratives. Experienced in client management and community engagement, and ventured into freelance content creation, contributing tailored and impactful content across diverse industries. Currently, collaborating with companies like Kanakkupillai, dedicated to delivering inspiring technical content rooted in a solid foundation.