Overview

In finance and economics, the liquidation of a company refers to the process of winding up its operations and distributing its assets to settle claims. This typically occurs when a company is unable to meet its financial obligations or repay its debts. During liquidation, the company’s assets are sold, and the proceeds are used to pay off creditors and shareholders. Essentially, company liquidation in India is the final step in closing a business and resolving outstanding liabilities.

During the liquidation process, assets are not always sold at their full value. In such cases, business and bankruptcy courts estimate the recovery value of the assets for distribution to creditors.

Liquidation is a formal process through which a company ceases its operations. The company’s assets are sold to repay liabilities, and any surplus is distributed among shareholders. In simple terms, liquidation marks the end of a company's business by converting its assets into cash to settle debts and distribute any remaining balance.

Types of Liquidation

Whenever a company decides to cease operations, it can go through one of the following types of liquidation processes:

1. Voluntary Liquidation

In voluntary liquidation, the company is not compelled to undergo insolvency proceedings. Instead, the decision to cease operations is voluntarily made by the owners or shareholders. This process usually occurs when the company is solvent and can repay its creditors in full. Voluntary liquidation can be classified into:

a) Member’s Voluntary Liquidation (MVL)

Member’s voluntary liquidation is initiated by the company’s shareholders when they decide that the company should no longer operate. The procedure begins with signing a declaration of solvency by the company’s directors, confirming that the company can repay its debts within a specified period.

b) Creditor’s Voluntary Liquidation (CVL)

Unlike MVL, a creditor’s voluntary liquidation is initiated when a company is insolvent and unable to fulfill its financial obligations. This process is often used when a company is facing significant financial distress and cannot recover.

2. Compulsory Liquidation

Compulsory liquidation occurs when a company is ordered by the adjudicating authority to shut down its business operations, usually at the request of creditors. This typically happens when the company is unable to pay its debts, making liquidation the only solution for creditors to recover their money.

To initiate compulsory liquidation, creditors must file a winding-up petition with the appropriate court. If the court finds the petition valid, it will issue an order to wind up the company.

Process of Company Liquidation

The liquidation process consists of several key steps:

Compulsory Liquidation Process

1.      Application to the Tribunal: Creditors or operational creditors can file an insolvency application with the tribunal if the company defaults on a debt exceeding 1 lakh rupay.

2.      Appointment of Interim Resolution Professional (IRP): The tribunal appoints an IRP to oversee the process.

3.      Moratorium Period: A moratorium is imposed to halt all operations and prevent asset transfers.

4.      Verification of Claims: The IRP verifies creditor claims and prepares a list.

5.      Appointment of Resolution Professional (RP): The Committee of Creditors (CoC) either confirms the IRP as the RP or appoints a new one.

6.      Resolution Plan: The RP drafts a resolution plan detailing creditor repayments.

7.      Sanction by NCLT: The NCLT reviews and approves the resolution plan.

8.      Liquidation of the Company: If resolution efforts fail, the NCLT orders liquidation, allowing debt repayment to creditors.

Voluntary Liquidation Process

1.      Declaration of Solvency: The company’s directors declare solvency and confirm no default has occurred.

2.      Board Meeting: The board of directors approves the liquidation process and appoints a liquidator.

3.      General Meeting of Shareholders: A special resolution is passed to approve liquidation and appoint the liquidator.

4.      Responsibilities of the Liquidator: The liquidator announces the winding-up in newspapers and processes creditor claims.

5.      Completion of Liquidation: The process must be completed within 12 months, with a final report submitted to the Registrar of Companies and the Insolvency and Bankruptcy Board of India (IBBI).

6.      Application to NCLT: The liquidator submits an application for the company’s dissolution, and once approved, the company ceases operations.

Advantages of Company Liquidation

1.       Debt Relief: Creditors can no longer demand payments from the company.

2.       Legal Protection: Prevents potential lawsuits against the company.

3.       Fair Asset Distribution: Ensures creditors receive an appropriate return.

Fastzeal Support

Fastzeal offers end-to-end assistance in company liquidation, ensuring a hassle-free and legally compliant process. Our services include:

1.       Expert Guidance: Assistance from experienced professionals for legal and financial support.

2.       Customized Solutions: Tailored approaches for voluntary or compulsory liquidation.

3.       Comprehensive Management: Handling all documentation and regulatory compliance.

4.       Transparent Communication: Regular updates throughout the process.

5.       Post-Liquidation Support: Assistance with any residual matters after liquidation.