08 Nov 2021 Ankit Chadha

Everything You Need to Know About Company Liquidation

Company Liquidation | TRC Corporate Consulting

The process of closing or bringing a company to an end is known as liquidation. Also referred to as winding-up or dissolution, at the time of company liquidation, the assets and property are used to repay the debt. It is distributed amongst the creditors and owners to make full and final settlements. Thus, company liquidation refers to the insolvency procedure where the company and its operations are bought to an end by a liquidator or insolvency practitioner. 

There are two types of company liquidations, one where the company is forced to shut down, and the other is known as the voluntary liquidation under IBC, where the company itself wants to liquidate its assets and become insolvent. It can be any of the two, depending upon the situation. In some cases, to repay the debts, instead of closing the entire company, some companies give up on some of their holdings by closing up a branch or selling a few assets.

Entering Company Liquidation 

To completely understand insolvency and liquidation, you must first know the answer ‘What does entering liquidation mean for a company?’

In simple words, if you wish to shut down your business (wind-up) or if you are being forced into doing it by creditors, it is said that your company is entering liquidation. This usually happens when you are unable to repay a debt. Entering company liquidation implies that your company will become non-operational and will not be allowed to do any type of business in the market. Your staff will be terminated, your assets will be utilised to cover your debt, and the company itself will become legally non-existing. During this process, you won’t be in the power of your company’s decisions and assets, and you will be restricted to access the business bank accounts of the company.

According to the liquidation process under IBC, even if it’s a voluntary winding up of a company, a licensed insolvency practitioner will arrange the liquidation of company assets. And finally, after the assets are distributed and the debts repaid, the company will be struck off the list of registered companies in India. Thus, the company will no longer exist.

 

Types of Company Liquidation In India 

The liquidation process under IBC states that there are two types of liquidation - compulsory company liquidation and voluntary liquidation. Further, there are two types of voluntary liquidation under IBC :

  • Creditors’ Voluntary Liquidation
  • Members’ Voluntary Liquidation

The voluntary liquidation under IBC is initiated or approved by the shareholders and the directors of the company. To get an in-depth understanding of the voluntary and compulsory liquidation process under IBC, continue reading.

  • Creditors’ Voluntary Liquidation: It is used in case of company insolvency and is initiated by the shareholders. This type of company liquidation or company insolvency suggests that the creditors will get the ownership of the company’s assets. For the same, letting the directors write off unsecured business debts that are not personally guaranteed at the time of winding up is a standard.
  • Members Voluntary Liquidation: This liquidation process is an exit strategy that the companies usually use to get out of bad debts. This is initiated by the directors and board members when they realise that the company will not be able to repay its debts on time. In order to avoid becoming a faulty debtor, the company decides to be liquidated, with the majority vote of 75% of the members.  And thus, the company is liquidated.
  • Compulsory Liquidation: This type of company liquidation is initiated by a creditor with the help of law. When a company is unable to pay its debts and a creditor legally forces it to shut down, it’s called compulsory liquidation. This liquidation process is considered the last resort after several attempts and negotiations over missed payments. Therefore, it is not the same as the voluntary liquidation process initiated by the directors.

What Are The Steps Involved In Company Liquidation Process? 

The company liquidation process consists of the following six steps:

  1. Firstly, the company appoints a licensed Insolvency Liquidator.
  2. Then the directors give up all their powers, and the licensed Liquidator takes over all the company’s managerial affairs.
  3. The company’s assets and possessions are then evaluated and realised (liquidated).
  4. All the creditors are then paid off based on the priority and urgency of their debts.
  5. The remaining or extra cash is allocated amongst the shareholders.
  6. The company is finally dissolved and ticked off from the list of registered companies in India.

What are the Responsibilities of the Licensed Liquidator? 

The role and responsibilities of a liquidator include:

  • Taking care of all the essential documents, from crating to presenting them, with the assistance of the company’s directors. Mainly they create a financial statement explaining the position of the business in detail.
  • Allocating the dissolved assets and surplus funds to the respective parties.
  • Identifying outstanding claims against the business and fulfilling those claims in order of priority set by law

Why Choose TRC Corporate Consulting For Company Liquidation? 

At TRC Corporate Consulting, we have a board of over 15 IBBI registered company insolvency professionals operating nationwide.  Benefit from our in-house expertise and let us help you take care of all the important duties involved in the liquidation process of your company. We provide end-to-end consulting services that will ensure a smooth and convenient liquidation process for your company.

At TRC Corporate Consulting, we don’t consider you just as a client; rather, we consider you our valued business partner and provide unparalleled assistance in all your business processes. So, get in touch with your most efficient business partner!