17 Feb 2022 Ankit Chadha

Liquidation of a Company: Everything You Need to Know

Company Liquidation | TRC Corporate Consulting

Liquidation in terms of finance and economics refers to the process of closing or bringing a business or firm to an end. The company liquidation process also involves the distribution of its assets to claimants or among the shareholders. It is an event that usually takes place when a company declares itself insolvent, meaning it cannot pay its obligations by the due date. As all company operations end, the outstanding assets are used to pay or repay the creditors and stakeholders based on the priority of their claims.

The question, ‘what is liquidation of a company?’ can be thus answered as the process of dissolving a company while settling all the debts with the help of its assets is known as company liquidation. Liquidation can be used to refer to the selling out of badly performing machinery and commodities at a lower price as compared to its original cost or at a price lesser than the business wants to sell it.

 

Types Of Company Liquidation Process in India

When learning what is liquidation of a company or understanding the company liquidation process and procedure, you must be aware of the three different types of the company liquidation process in India.

Members’ Voluntary Liquidation (MVL) 

Members’ Voluntary Liquidation is the solvent type of liquidation and is usually used when a director wants to retire, or the business has run its course and has no further utility.

The entire process of this type of company liquidation is carried out under the supervision of a licensed official known as the insolvency practitioner (IP), who makes sure all legal requirements of the company liquidation process and procedure are met. They realise the company’s assets, repay the creditors, and distribute the remaining profits amongst shareholders in accordance with their share or investment.

An MVL can be one of the most tax-efficient ways to shut down a business as the money collected on the dissolution of the assets is taxed as capital rather than revenue. However, this varies on various factors, such as whether you and your plans for any future businesses are qualified to obtain Entrepreneurs’ Relief.

 

Compulsory Liquidation

This type of liquidation is initiated by one or more creditors who are unpaid a certain amount of money. If a winding-up order is allowed by the court, business assets are sold for the benefit of the creditors, and the company is forcibly shut down.

This is the most severe form of company liquidation and results in termination for all employees. Directors also face a comprehensive investigation by the liquidator to determine whether their activities were responsible for the company’s poor financial situation.

Creditors’ Voluntary Liquidation (CVL) 

A Creditors’ Voluntary Liquidation eventually results in company termination, with assets being sold off to pay off the creditors as far as possible. Directors have the authority to choose a licensed IP to carry out this company liquidation process in India. Although an inquiry into their actions does occur, directors are seen to have put their company’s creditors first by voluntarily entering liquidation.

The company’s creditors vote on the CVL request, and if 75% or more (by the value of debt) say yes, the decision becomes legally binding for all parties, and the process of company liquidation can be initiated after that.

A major benefit of this   is that the directors are qualified for statutory redundancy. This could be used to pay the professional fees involved, perhaps repay some of the company’s obligations, or provide the directors with a financial support for the short term.

For your better understanding about the Voluntary Liquidation of a company here is a step-by-step procedure that it has to follow:

STEP – 1: The Board Announces Solvency

The board of directors are required to make a declaration or announcement of solvency in the form of an Affidavit stating the following-

  • The company did not fail to pay on any repayment of dept
  • The company is solvent and will be able to pay its creditors through the assets that will be sold in the voluntary liquidation procedure
  • The liquidation is not being conducted with an intent to defraud any individual or individuals

STEP -2: Hire A Company Insolvency Professional 

The board must recognize and appoint an insolvency professional to act as a liquidator. This individual should be registered with the Insolvency and Bankruptcy Board of India and must have an in-depth knowledge of the entire processes of voluntary liquidation under IBC.

STEP – 3: Organise Meetings with Stakeholders

The board is required to set up a meeting with the shareholders within four weeks of declaring solvency and the following resolutions need to be passed in the meeting:

  • Resolution concerning the appointment of a liquidator for the company
  • Special resolution for liquidating the firm voluntarily

STEP – 4: File Resolutions with The Registrar of Companies And IBBI 

STEP – 5: Liquidator Is Declared in Charge of The Company

STEP – 6: Public Declaration of The Solvency

How TRC Helps with Voluntary Liquidation Under IBC? 

TRC Corporate Consulting’s insolvency services provide you with expertise that our financiers and consultants have achieved through their years of experience. Due to our insolvency and bankruptcy expert’s extensive experience in collaborating with clients from around the world, you can rest assured that the provided support and consulting would be structured on the basis of the various legal compliances and laws. 

At TRC Corporate Consulting, we don’t think of you as our client, but as a business partner. Thus, we provide you with the best IBC advisory services and help you understand more about the different types of voluntary winding up. Making sure we fulfil our top priority of meeting your business needs. For further understanding of our Voluntary Liquidation services, or any other financial advisory service, contact us!

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