What is the Liquidation Of the Company?
Simply put, Liquidation is the process initiated by a company to close its operations. The company may decide to wind up due to various reasons such as unwillingness to continue with the operations, insolvency and so on. As the term suggests, liquidation of a company refers to liquidating the assets of the company. By initiating the liquidation process, the company may sell its assets to meet obligations and repay liabilities.
If a company is liquidated due to bankruptcy, the liquidator can sell its assets to repay all pending liabilities. The remaining balance, if any, after repayment to the creditors, gets distributed among the shareholders of the company.
How to wind up a company?
- The winding-up of a company involves a shutdown of all business operations, transactions and selling off all company’s assets to other individuals or entities, to clear off company debts.
- Once the debts have been cleared off, the remaining assets of the company will be shared among shareholders concerning the capital invested by them
- The winding-up of the company can be executed in two different ways
- Compulsory winding up: The compulsory winding up of a company can be executed by the order of a tribunal or a court, bypassing a special resolution made by the directors during the company’s board meeting, which proposes a court intervention. Identically, by filing a petition to a court or a tribunal by any official person of the company, if the company has indulged in any fraudulent/unlawful activities, it can be winded up compulsorily.
- Voluntarily winding up: The company requires a resolution from the directors, to sell off all assets of the company or to transfer the stakes to another entity.
What are the benefits of winding up a company?
Free from debts after liquidation: Once the liquidation process is over, the directors and all company officials are free from all creditor liabilities and pressure.
Avoiding legal action against the company: If the resolution is passed voluntarily by directors, they will neglect legal action taken by the court or the tribunal, and provide a platform to company directors to concentrate on other business opportunities.
Comparingly low cost charged for liquidation: The cost or expenses involved in the liquidation process is relatively low, as charges will be applicable on the sale of assets.
All lease agreements will be cancelled: If any company or entity has entered into a lease for a prescribed time, during the liquidation process, it will terminate all the terms and conditions of the lease. If any penalty has to be paid, it will be deducted from the sale of assets.
Advantages for creditors: After a prolonged struggle, creditors will benefit from the liquidation process as they will be eligible for a default payment, concerning the proposition of credits given by all creditors.
What are the checklist rules for winding up a company?
- Board meetings should be convened for the approval of winding up a company.
- A notice should be issued in written form for convening a general meeting to pass a resolution on the winding-up procedure.
- An appointment of an official liquidator or insolvency professional should be made.
- The income tax department should be acknowledged with respect to the resolution passed at the meeting for voluntary winding up of the company.
- Simultaneously, the No Objection Certificate (NOC) should be obtained from the Income-tax department.
- If the creditors are in majority, then the creditors meeting should be conducted to approve the resolution passed in the general meeting; given that creditors are owed 2/3rd of the company debts.
- Before initiating a wind-up process, an intimation should be conveyed to the Insolvency and Bankruptcy Board of India (IBBI) within 7 days from the date of approval of the resolution.
- An announcement should be made to the public within 14 days of passing the wind up a resolution in an official gazette, one English newspaper, and one local newspaper, where the registered company has been located.
- The whole winding up the process should be completed within 12 months from the initiation of the liquidation.
How to wind up a private limited company?
Winding up of a private limited company can be done in 3 different ways. They are
- Selling company shares: By selling the majority company shares to another person or entity, the shareholders will avoid the burden of debts. Hence, voting powers, rights, and responsibilities will be laid on the acquired person or the entity.
- Voluntary wind up: Voluntary wind up can be commenced either by special resolution or a resolution taken during a general body meeting. By violating any of the terms and conditions of the memorandum of association (MOA), the winding can be executed. Similarly, due to insufficient financial funds or inability to clear the debts, a company can be winded up.
A voluntary wind up can be of two types
Members’ Voluntary Winding Up
If a company remains solvent (able to pay the debts) at the time of closure and its directors make a voluntary declaration for the same, it is termed as the Members’ Voluntary Winding Up. Such a declaration should have the following characteristics-
- It must be substantiated by an affidavit
- It must be made within 5 weeks preceding the date of the resolution passed by the company to wind up. It must be submitted to the registrar before the due date.
- A copy of the latest and audited profit & loss statement of the company ( as on a practicable date before the declaration of solvency) should accompany the declaration
- The latest company balance sheet and a statement of assets & liabilities should be enclosed with the declaration.
The following steps are necessary to carry out the process of Members’ Voluntary Winding Up-
- Solvency declaration by the directors, as mentioned above
- The statutory declaration to the Registrar
- Appointment of liquidator
- Collection of the assets belonging to the company, payment of its liabilities and distribution of the balance of the proceeds among the contributors.
Creditors' Voluntary Winding Up
f the solvency declaration is not made by the directors and submitted to the registrar, the company is presumed to be insolvent. In such a case, the creditors must meet (usually after the company general meeting) to pass the resolution for winding up and liquidation of the company.
The following steps are necessary to carry out the process of Creditors’ Voluntary Winding Up-
- The general meeting of the company passes a resolution to wind up the company operations
- A meeting of the creditors must take place
- The members and creditors must appoint a liquidator or a group of liquidators
- They must set up a committee of inspection as well
- The process of winding upstarts as per provisions of law
Procedure for voluntary wind up
- With respect to the companies act, 1961, the resolution of the board meeting is essential to start the winding up process.
- In a special resolution, a majority of 3/4th of the company shareholders should register their vote on the side of winding up the company.
- Similarly, the company’s creditors should approve the resolution made for winding up, without complications.
- The “Declaration of Solvency” should enclose outstanding debts along with the auditor report, regarding total assets of the company and it should be forwarded to the RoC (Registrar of Companies).
- Now the official liquidator will be appointed to perform the winding up process from the date of passing the resolution.
- After the resolution has been passed, the liquidator should open a bank account within a period of one month.
- In any scheduled bank, the liquidator should open a bank account in the name with, the prefix “ the name of the company” followed by “voluntary liquidation”.
- The liquidator will collect all the reliable documents and prepare a report consisting of final accounts and present this in a general meeting for approval. Here, the majority of members should pass this resolution.
- After compiling all the necessary documents, the final report will be sent to the tribunal for reference.
- After examining the credibility of the report, the tribunal will pass a decree for the dissolution of the company.
- A copy of that decree will be forwarded to RoC by the liquidator within 30 days of the order dated.
- Now the RoC will mandate the winding up of the company, and remove the name of that company from the registry.
- Simultaneously, the RoC will publish this order in the official gazette of india.
Compulsory wind up: Any company registered in India can be compulsorily winded up by theaction of the tribunal or court, if the respective company has indulged in any fraudulent/ unlawful activities. The petition can be filed by - The company itself
- The Registrar of companies (RoC)
- The creditors of the company
- The central/state governments
- The contributors
Procedure for compulsory wind up
- The petition to the tribunal should be filed along with the statement of affairs, of the disputed company.
- After scrutinizing the credibility of the petition filed, the tribunal may accept or reject the aforesaid petition.
- Here, the liquidator will be appointed by the tribunal itself.
- The liquidator will execute all assets of the company, examine the book of accounts, and compile into a draft/report.
- These reports are to be forwarded to the tribunal after the winding up committee had accepted the same.
Vakilsearch’s Procedure for Winding Up A Private Limited Company
Declaration To ROC
The statement of accounts must be submitted within a month before the submission of the application to wind up the company. This is a declaration to the Registrar of Companies that the contents of the application are only to be considered, and that the company has no other assets or liabilities.
Submit Documents
Within a month of submitting the statement of accounts, the application must be submitted along with the documents mentioned above. Our representatives will guide you through the entire procedure.
Final Closure
It takes at least two to three months to complete the closure of your company, but it could take much longer, depending on the findings of the liquidator appointed.
What are the documents required for the closure of the company?
The documents required for the closure of the company are;
- PAN card of the company
- Certificate of closure of the company’s bank account .
- An indemnity bond, which should be notarized by the directors.
- Latest statement of company accounts.
- Statement of accounts related to all assets and liabilities of the company, audited by Chartered Accountant (CA).
- Proof of approval of the resolution by 3/4th of board members.
- Application for removing the name of the company.
FAQs
Liquidation is important for the following reasons-
- Once the liquidation process is over, the directors and other company officials are free from all creditor liabilities.
- If the company directors pass a voluntary declaration, the company can avoid legal actions from a tribunal or a court.
- The cost involved in the liquidation process is comparatively lower than other modes of closure
- The creditors are benefited as they will be eligible for default payment from the sale of assets
Some of the most prominent causes for a company to go into liquidation are-
- Insolvency
- Bankruptcy
- Unwillingness to continue with business operations
The liquidation strategy refers to liquidating the assets of a company before winding up operations. By initiating the liquidation process, the company may sell its assets to meet obligations and repay liabilities.
As a part of the liquidation strategy, a liquidator is appointed to oversee the process of selling the company assets. The remaining balance, if any, after repayment to the creditors, gets distributed among the shareholders of the company.
The liquidation marks the end of business operations by a company and this may lead to the unavoidable loss of jobs for the employees. However, the company administration may look to restructure the organization and save some (or all) of the jobs in the process. But, the employees will have the right to claim dues owed to them by the company.
If the employer goes into liquidation, there will be no business continuity and the employees will be without a job. However, the employees will have the right to claim dues (salary, allowances, etc) owed to them by the company. If there are no funds with the insolvent company to pay the employees, they can approach the National Insurance Fund (NIF) for payments due.
In general, the liquidation process of a company in India can take up to 2 years to complete, since the date of application, in case of compulsory liquidation. It may take less time for a voluntary liquidation process to complete. The duration may vary from company to company, depending on the complexity of the process involved.
After a company is liquidated, the liquidator can sell its assets to repay all pending liabilities. The remaining balance, if any, after repayment to the creditors, gets distributed among the shareholders of the company.
Yes, you can remain a director of the company after liquidation, but, you will not have any more control over its business affairs. You can set up and be the director of a new company. But, the new company cannot have the same/similar name to the liquidated company.
No. A company should not do trading activities while undergoing liquidation. This is because the directors do not have any more control over their business affairs.
If the liquidator comes to know about any trading activity being undertaken by the directors, he can initiate prosecution against the directors.
Exceptions:
- The liquidator can allow trading if such an activity is for repaying the creditors
- He will allow trading if it is for collecting the debts accrued by the business.
No. You cannot liquidate your own company. Only the shareholders of a company can put it into voluntary liquidation. Then, a licensed insolvency practitioner will be appointed as a liquidator and only he can start the liquidation process.
Usually, directors are not personally liable for company debts. Therefore, if the company fails to pay off its debts and the creditors move court, the company assets are put to risk only and not the personal assets of the directors.
The company directors can decide to put the company into voluntary liquidation by passing a board resolution in this regard. At least 75% of the shareholders of the company must agree for liquidation.
If the resolution is not made by the directors, the company is presumed to be insolvent. In such a case, the creditors must meet to pass a resolution for winding up and initiating the process of liquidation of the company.
Yes. One can reverse a Members’ Voluntary Liquidation (MVL). But, it’s not easy for the directors to do so, just by changing their minds. They can only do it by making an application to the concerned High Court and requesting an annulment of the said liquidation. The application has to be made within 6 years of the liquidation.
By initiating the liquidation process, the company assets are sold off by the liquidator to meet obligations and repay creditors. If you are a secured creditor, you will be at the top of the ‘payment hierarchy’ and will get the first preference while distributing the proceeds of the sale. On the other hand, if you are an unsecured creditor (suppliers, employees, and banks), you will be at the bottom of the ‘payment hierarchy’. Therefore, when you claim money from a company in liquidation, your claim will be processed by the liquidator according to your position in the ‘payment hierarchy’.
Yes, he can. But, a director is not advised to resign from a company when it is under the process of liquidation. This is more so for a director if he has provided a declaration for solvency. However, if he resigns in an unavoidable situation, he doesn't need to file the DIR-12 Form as the status of the company is ‘under liquidation’.
When a company is dissolved and gets liquidated, the name is struck off from the company register. The name can be made available for other companies for future use.
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