Company Liquidation Process and Procedure

Liquidation is the legal procedure by which the company comes to an end. The process through which a company is going to shut down due to various reasons. According to the dictionary meaning liquidation means ‘the selling of the assets of a business as part of the process of dissolving the business.’ Company is an artificial person which is created by law and the ending procedure is known as liquidation.

When a company is sick and not making any profit, going through a great loss, or unable to pay the debt in such circumstances a company thinks of liquidation. Though there is another way that could be of a voluntary act as well in law ensures that all dues of the company it can be debts too, will be paid before it closes down. Firstly, the company will try to revive itself by internal reconstruction or external reconstruction.

In a Country like India, even if the liquidation does not affect the owners but will definitely effect the employers of the company. All the employers related to the company will be sufferers of the liquidation. Unemployment is a big issue in our society, for that reason liquidation is not the first option but the reviving of the company is. If it does not give a good result than then liquidation is the key to the solution of every problem.

Liquidation in a big process before that we have to understand the winding up process. In legal terns winding up is the first step of liquidation that can take place in 3 different mode –

  1. Inability to pay debt – If the company defaults and not able to pay the debts then it will be called as compulsory winding up, which will be done by NCLT (National Company Law Tribunal) (According to Insolvency and Bankruptcy Code, 2016)
  2. Grounds other than inability to pay debts – Company Act 2013 with court rules.
  3. Company itself wants to liquidated by Tribunal
  4. Company is acting against India
  5. Company has conducted fraudulent activities
  6. Default in filing annual return for 5 years
  7. Winding up on just an equitable grounds in the opinion of Tribunal
  8. Voluntary winding up – If the company wants to close down the company, because of the purpose or the duration of the company is completed, then they can voluntarily wind up the company. (Section 59 of IBC 2016)

Process of Liquidation

The process of liquidation takes a huge time period and is divided into various stages, every stage requires proper approval for moving to the next stage. In case of voluntary winding up the company has to follow all the rules and regulations mentioned in Section 59 of the Insolvency and Bankruptcy Code, 2016.

In case of Compulsory winding up i.e. when the company is enable to pay the debts or on grounds other than inability to pay debts, authorities have to file a petition. The authorities can be the company itself, the contributors, the registrar, the person authorise by Central Government or the Central Government/ State Government itself. The petition will be file in NCLT (National Company Law Tribunal), and if the NCLT feels that there is no other option than just to liquidate the company, the NCLT will pass an order to the Board of Directors of that particular company have to prepare a statement of affairs. The statement of affairs will contain all the details of the company, including assets and liabilities.

The NCLT will appoint a liquidator, who will carry out the process of liquidation. As because the liquidator is a third party and doesn’t have any idea about the company, so the statement of affairs will be given to him to understand the matters of the company. The liquidator then immediately start the process of liquidation i.e. selling of the assets of the company, paying the liabilities in a particular order which is mention in the Company Act 2013. The liquidator has to create liquidation estate to hold all the assets. All the selling of the assets, will bring some liquidation estate which will be distributed to the funds of the company. The fundholders are the employers, workmen’s and all individual who are related to this company. The funds will be distributed according to the waterfall scheme under IBC (Insolvency and Bankruptcy Code, 2016).

This Article Written by Ankita Nandi, Student of  Kingston Law College.

Also Read – Important Rules and Regulations of IBC

Law Corner

Leave a Comment