The termination of a business or business division is known as liquidation. To settle debts and other liabilities, the company sells off assets. The remaining money is divided among the owners, shareholders, and investors following the resolution of all claims.
Most firms fail as a result of bankruptcy or subpar company performance. Alternatively, it can result from a business restructuring or the exit of significant investors. After liquidation, the company's name was also removed from the Register of Companies (ROC).
Liquidation is otherwise called dissolution or winding up. A winding up is a tactical decision frequently made to eliminate a failing asset or business. Natural land, buildings, machinery, tools, furniture, automobiles, and inventory are examples of assets.
One hires a liquidator or an insolvency practitioner to manage the dissolution professionally. The liquidator then generates money by reselling corporate assets on the open market. It pays off creditors and lenders in full. Liquidators also bill clients for their services. The process differs slightly from business to business based on several variables such as complexity, company size, etc.
Types of Company Liquidation
On the basis of how the liquidation process is initiated, it can be classified into three types.
1. Compulsory or Forced Liquidation
This is also known as involuntary insolvency/liquidation in which the company is forced to liquidate and sell off its assets to pay off its debts. In this situation, the creditors ask the court to dissolve the company. Creditors no longer trust the company to be able to pay them.
2. Members' Voluntary Liquidation
Dissolutions occur voluntarily when a corporation is financially stable and able to settle all its obligations. After the initial purpose for its formation has been satisfied, a company's owners may elect to dissolve it. As an alternative, business owners can be moved, or the company might go through a restructuring.
3. Voluntary Creditors Liquidation
The corporation becomes insolvent, and the directors or owners start this process to prevent court involvement or forced dissolution. In other words, the company files for bankruptcy before its creditors may take legal action against it.
Process of Liquidation
The liquidation of a company generally involves the appointment of a liquidator, who will be responsible for selling the company's assets, paying off its debts and distributing any remaining funds among its shareholders.
1. Application to the tribunal
Financial or operational creditors may apply for insolvency with the tribunal. It is done to make sure the business starts the procedure for resolving corporate insolvency. The applicant must ensure that the default amount exceeds Rs. 1 lakh.
2. IRP appointment
After the tribunal accepts the case, an interim insolvency resolution professional (IRP) will be chosen. The company's management will be transferred to the IRP.
3. Moratorium period
The corporation will be subject to a moratorium following the appointment of the IRP, which requires that all business activity cease. You cannot transfer assets, products and services. It will continue as long as the corporate insolvency resolution is not finished.
4. Verification of claims
Within 30 days, the interim resolution expert must review and investigate all claims filed by creditors. He then must compile a list and deliver it to the committee of creditors.
5. Resolution professional
The committee of creditors can continue with the interim resolution professional or appoint a new resolution professional.
6. Resolution plan
The resolution specialist will design a plan outlining the terms under which each creditor will be paid back. The creditors' committee has 180 days to adopt this scheme.
7. NCLT approval
It is required for the resolution plan after it has been finalized. The resolution specialist must complete all processes and obtain all essential permits within the following year of receiving NCLT approval.
8. Liquidation of the company
If the procedures above are followed, the NCLT must approve the company's liquidation and compensate its creditors.
Process of Voluntary Liquidation
1. Affidavit: The company's directors must certify in an affidavit that the company is solvent. The affidavit must state that the business has not defaulted, that this action is not being taken to mislead anyone, and that it is able to pay its creditors.
At the board of directors meeting, the directors must approve the liquidation procedure. They must choose who will serve as the liquidator and prepare a statement outlining the reasons for the liquidation for the general meeting.
2. Shareholders' meeting:
Four weeks after the declaration of solvency, a shareholders' meeting must be conducted. The decision to appoint a liquidator must also be finalized, and a special resolution must approve the company's liquidation.
Liquidator duties include publishing a notification about the company's winding up in an English and regional newspaper to elicit claims from diverse stakeholders. The list of all the claims will then be evaluated and finalized by the liquidator. To pay off all the stakeholders, the liquidator must realize all the assets.
3. Company liquidation:
The company's liquidation process must be finished within a year of the process's beginning. The liquidator must prepare a final report detailing every aspect of the settlements. This report must be delivered to the company's registrar and IBBI.
4. Application to NCLT: After completing the actions above, a corporation dissolution application must be submitted to the NCLT. The company will stop operating as of the date the NCLT issues an order dissolving the entity.
The order of claims
Following is the primary order in which claims are resolved during the liquidation process:
The company first pays its secured creditors, including the bank that issued the mortgage loan, and then reimburses all preferential secured creditors, including employees and landlords. Finally, the company pays the insolvency attorney appointed to handle the liquidation.
The next group of creditors are suppliers, HMRC, workers, owners of debentures, credit card companies, and other unsecured creditors.
Stakeholders: Shareholders, investors, and owners are given some leftover money.
The company's name is deleted from the ROC as soon as the dissolution process is finished. When a business fails, many employees lose their jobs. However, contract workers are also entitled to be compensated for this loss.
Additionally, as soon as the dissolution procedure begins, all owners' rights vanish and are given to the insolvency practitioner. As a result, the business cannot dispose of properties or assets in any way they like. The insolvency expert makes all such judgements.
1. How can I begin the process of liquidation?
The sale of each asset individually begins the process of a company's liquidation. Except for cash and bank balances, decisions are made based on priority and necessity as understood. After paying off the liabilities, the balance is subsequently divided among the distributors.
2. Exactly who is a liquidator?
An officer exceptionally appointed to wind up a company's affairs when the company is closing, usually when the corporation declares bankruptcy, is referred to as a liquidator. The liquidator sells the assets of a firm, and the revenues are used to settle its debts.
3. How long can a company be liquidated?
In this scenario, the liquidator must finish the corporate person's liquidation within 270 days of the liquidation's start date.
4. Who receives payment first upon liquidation?
secured lenders receives the first payment.