Liquidation of a Company - an Overview

Simply put, liquidation is the process by which a company shuts down its activities. The company may decide to close down for a variety of reasons, including a refusal to continue operations, insolvency, and so on. The word ‘liquidation of a company’ refers to the process of selling a company's assets. The company can 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.

Checklist

• Board meetings should be convened for the approval of winding up a company
• The appointment of an official liquidator or insolvency professional should be made
• Simultaneously, an NOC should be obtained from the Income Tax Department
• 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 resolution in an official gazette, one English newspaper and one local newspaper, where the registered company has been based
• The whole winding up process should be completed within 12 months from the initiation of the liquidation

Documents Required

• 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 a chartered accountant (CA)
• Proof of approval of the resolution by 3/4th of the board members
• Application for removing the name of the company

Benefits

• 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 costs or expenses involved in the liquidation process are 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, with respect to the proposition of credits given by all creditors.

Modes of Winding Up of a Company

Winding up of a private limited company can be done in 2 different ways. They are:

• Voluntary winding up: Voluntary winding 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 up can be executed. Similarly, due to insufficient financial funds or the inability to clear debts, a company can be wound 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.
• Compulsory winding up: The compulsory winding up of a company can be executed upon the order of a tribunal or a court by passing a special resolution proposing a court intervention made by the directors during the company’s board meeting.

Identically, if any official of the company files a petition to a court or a tribunal, or if the company has indulged in any fraudulent/unlawful activities, it must be wound up compulsorily