Learn about the different types of liquidation and find out how each is initiated and how the company's assets are distributed to creditors and shareholders.

Table of Contents

Introduction:

Liquidation is the process of winding up a business and distributing its assets to creditors and shareholders. It can be a voluntary decision by the company’s directors or shareholders or court-ordered in the case of compulsory liquidation. The goal of liquidation is to dissolve the company and settle its debts in an orderly and fair manner. In the process of liquidation, the company’s assets are sold off and the proceeds are used to pay off creditors. If there are any remaining assets, they may be distributed to the shareholders. This article explains in detail the three different types of liquidation, how each is initiated, and how the company’s assets are distributed to creditors and shareholders.

Liquidation can be a complex and time-consuming process, and the specific steps involved will depend on the type of liquidation and the laws of the country in which the company is based. But with Vakilsearch, the whole process of liquidation is made easy. The attorneys in Vakilsearch will keep you informed of all the steps involved in the liquidation process and ensure that you have all the necessary information. Additionally, the cost-effective options for initiating the liquidation process will suit your budget.

Voluntary Liquidation:

Voluntary liquidation is the winding up that occurs when a company’s directors or shareholders decide to dissolve the company and wind up its affairs. This is a voluntary winding up, where the company is solvent and able to pay its debts, or an insolvent winding up, where the company is unable to pay its debts. In a voluntary liquidation, the company’s assets are sold off and the proceeds are used to pay off creditors and shareholders.

Voluntary Liquidation Can Happen:

By an ordinary resolution if the duration of the company, as specified in the articles of association, has expired or if a specified event outlined in the articles has occurred
By a special resolution passed by the members. This resolution must be publicly announced through an advertisement in the official Gazette and newspapers.

Types of Liquidation:

The three main types of liquidation are:

Member’s Voluntary Liquidation (MVL): In a member’s voluntary winding up, the company is solvent and able to pay its debts. The directors must declare solvency to initiate this type of liquidation. They must pass a resolution stating that the pvt ltd company is able to pay its debts in full within 12 months of the commencement of the liquidation. The directors must also appoint a liquidator, who is responsible for overseeing the MVL process and distributing the company’s assets to its shareholders.
Creditor’s Voluntary Liquidation (CVL): In a creditor’s voluntary winding up, the company is insolvent and unable to pay its debts. A meeting of the company’s creditors must be called to pass a resolution for winding up in this case. Unlike a member’s voluntary liquidation (MVL), which is only available to solvent companies, a CVL is available to both solvent and insolvent companies. However, it is typically used by insolvent companies that are unable to restructure or reorganize their debts and need to wind up their business in order to pay their creditors.
Compulsory or Forced Liquidation: Compulsory or forced liquidation is a type of liquidation that occurs when a company is unable to pay its debts and a court orders the company to be wound up and its assets to be sold off. Compulsory liquidation can be initiated by a creditor, the company, or the government.

In compulsory liquidation, the court appoints a liquidator to oversee the process of selling the company’s assets and distributing the proceeds to creditors. The liquidator has the power to sell off the company’s assets, enter into new contracts, and make other changes to the company as needed to wind up its affairs.

If there are any remaining assets after the creditors have been paid, they may be distributed to the shareholders. However, in many cases, the proceeds from the sale of the company’s assets are not enough to pay off all creditors, and the shareholders may not receive any payment. The specific process for compulsory liquidation will depend on the laws of the country in which the company is based.

Documents Required for the Liquidation of a Company in India:

In India, the process of liquidating a company is governed by the Insolvency and Bankruptcy Code (IBC). Under the IBC, the following documents may be required to initiate the liquidation process:

A copy of the business PAN
Resolution of the board of directors to initiate liquidation proceedings
A copy of the company’s memorandum and articles of association
A list of the company’s creditors and the number of their claims
A list of the company’s assets and liabilities
A statement of the company’s affairs
A statement of the company’s financial position
A report from the company’s auditor on the financial affairs of the company

Conclusion:

May it be any type of liquidation, the goal is to distribute the company’s assets in a fair and orderly manner to its creditors and shareholders. The specific process for liquidation will depend on the type of liquidation and the laws of the country in which the company is based. So, expert guidance like Vakilsearch might be required to assist you throughout the process. For any kind of assistance with respect to the liquidation of the company, you can seek online guidance here at Vakilsearch as they are very approachable and affordable.

FAQs

When is MVL used?

MVL, or Members' Voluntary Liquidation, is typically employed when a solvent company decides to cease operations. It is commonly used during business closures, restructuring, or when shareholders wish to distribute assets among themselves.

How does MVL work?

In MVL, shareholders appoint a liquidator to wind up the company's affairs. Assets are sold, liabilities settled, and remaining funds distributed among shareholders, often resulting in tax advantages for them.

How does CVL work?

CVL, or Creditors' Voluntary Liquidation, occurs when a company is insolvent, and its directors decide to wind it up. The appointed liquidator realises assets, pays creditors, and distributes any remaining funds according to a statutory hierarchy.

When is Compulsory Liquidation used?

Compulsory Liquidation is initiated by external parties, such as creditors or regulatory authorities, when a company is unable to pay its debts. It is a legal process mandated by the court to wind up the company's affairs.

What happens to employees in liquidation?

In liquidation, employees become creditors for unpaid wages and other employment-related claims. Employee claims are prioritised in the distribution of remaining assets, but the amount they receive depends on the available funds after settling higher-ranking creditors.