This article is authored by Magaonkar Revati, from Dayanand College of Law. This article elaborately deals with the liquidation and the procedure of winding up the company.
Table of Contents
Introduction
The liquidation process is initiated by a company that is under the burden of debt. It starts the process of liquidation to wind up and stop its operations and transactions. The company sells its assets to overcome its liabilities and obligations. A company is generally liquidated when it is certain that the business is not in a state of profitability to be continued. There are various reasons behind a liquidation of a company, such as insolvency, bankruptcy, unwillingness to continue its activities and operations, etc.
In this article, we are going to study and understand the process of liquidation of a company, how it is done, the purpose behind it and last but not least is there any outcome out of it.
So the winding up is the process where all the assets and property of the company gets distributed within the creditors as per the debt outstanding and if any surplus amount remains distributing it within members, shareholders, owners, etc. as per their rights. For these activities, an administrative person called a liquidator has to be appointed by the board of directors. After all these processes, the name of the company struck off from the register of companies.
Meaning of the term “liquidation”
Liquidation is a process of bringing the finance and economics of a business to an end. This event generally comes when a company has been insolvent and is unable to pay its obligations, so it distributes the property within its claimants. Subjects of the liquidation are its general partners.
Liquidation is a process of terminating the affairs of a company, business, etc. by the way of realizing its assets to be discharged its liability.
Liquidator
A liquidator is a person generally appointed by the court, unsecured creditors or by the shareholders of the company. He is the person who liquidates assets (in most cases). The liquidator is mainly appointed when the company has been insolvent and bankrupt. After his appointment, he takes control of all the assets, properties of the organization and persons.
He has the legal power to act in different capacities on behalf of the company. For liquidation, the liquidator can sell the assets of the company in the open cash market any other things having equal value.
The main and important role of the liquidator is to investigate all affairs of the company, the liquidator has to find out if any assets need to be recovered if those have been misplaced or sold at a lower price than the market value. The liquidator has the liberty to reverse these types of transactions.
Role of the liquidator
The liquidator is appointed for handling the liquidation process. Their main role and responsibility are to manage all the activities, accounts, assets, etc. of the company and to liquidate all these as per dues that need to be paid to the creditors. A liquidator can also pay from the funds of the company if it is available.
Scope of the work of liquidator
The scope of the liquidator’s work is given under Section 35 of the Insolvency and Bankruptcy Code, 2016. It has been explained below:
- The liquidator has to verify all the claims of the creditors.
- He has to take control and custody of all the assets, effects, and actionable claims of debtors, property, etc.
- To enumerate the property and assets of the corporate debtors in the way prescribed by the Board and has to prepare a report on it.
- To protect the property and assets of the corporate debtors when he considers it necessary.
- Continuing and carrying on the business of corporate liquidators for the beneficial liquidation if he considers it necessary.
- To inquire about the financial affairs of the corporate debtors to compose unnoticed and preferential transactions.
- Applying the adjudicating authority for orders and directions that may be necessary for the liquidation of the corporate debtors and reporting the progress in the manner prescribed by the Board.
- Performing any other functions that are specified by the Board.
Reasons behind liquidation
The liquidation occurs when a limited company reaches a point where for one reason or another it has to decide not to continue the business. Basically, in this case, a company can consider liquidation. Generally, it means turning the assets of a company or business into the form of cash, and this is typically done for paying the different types of debts such as creditor’s investment in the business or loans taken for the growth of the business.
The main reasons behind the Liquidation are insolvency and bankruptcy, these have been explained below:
Insolvency
Insolvency means a state or phase where a person or company enters when it is unable to pay the debts and dues. A company becoming insolvent shows that its debts and obligations are greater in value than its income and assets. Due to which they become unable to pay back the debts and dues in present or also in the future.
A company can become insolvent even when the assets of the company overcharge its liability if the assets are not easily converted into the form of cash needed for making necessary payments.
A company becomes insolvent when it doesn’t keep up its quality or any other thing to get adjusted with the present market conditions, when the company’s growth plan macerates its financial resources, lack of bookkeeping, fraud, improper management, etc.
Bankruptcy
Bankruptcy means when a person, company, or business gets declared insolvent. It is the term used for those persons of companies who have now become incapable of paying back their outstanding debts or dues. When a company becomes bankrupt, it can be said as it has been released from its debts and can have a fresh start while being ensured that its assets get shared with the creditors to whom it proportionately owes the money but here there are also some restrictions and limitations to it.
So basically bankruptcy is one of the last options and it has so many steps for insolvency which have to be understood and to be taken to avoid bankruptcy.
Types of liquidation
There are mainly three types of liquidation, compulsory liquidation, voluntary liquidation and creditors voluntary liquidation. These are explained as follows:
Compulsory liquidation
A compulsory liquidation is known as the situation when a person or company is unable to pay its debts or dues, does the creditor himself files a suit in the Court of Law for winding up the company. If the company doesn’t pay the debt before the date of the court, successful application and the order has been made, the accounts of the company or business get frozen. In this process, assets get liquidated and the outcome from it gets divided between creditors.
Company liquidation
It is a formally organized liquidation that is arranged where the creditors of the company are agreed. In this form of liquidation, it is not necessary or fixed that all the creditors will get agreed upon but it needs a majority vote of 75% then only it will secure the deal.
All creditors are bound to it even if they do not vote for it. As it becomes a legally binding contract on parties it will stop the interest on the money owed by them and will pay back the proportionate amount to the creditors as per they owe it.
Voluntary liquidation
When the directors, owners, shareholders of a company came to know that the company is failing to pay the debts owed by it, under such circumstances the liquidator takes control over the company and takes command over the liquidation process. This liquidation is the most used in many cases.
Members voluntary liquidation
There are so many instances like the business is going well but the business owner doesn’t want to carry on the business. Like this instance in this type of liquidation, the owner or partners of the company/business don’t want to continue it as per their own choice.
Procedure for liquidation of a company
The procedure for winding up of the company caused out of its inability to pay its debts or voluntary wind up is prescribed under the Insolvency and Bankruptcy Code, 2016.
On the other hand, in the Companies Act, 2013 the process for liquidation of the company has been prescribed for reasons other than its inability to pay debts.
On January 24th, 2020 the Companies Rules, 2020 (for wind up) were notified by the Ministry of Corporate Affairs by enumerating the liquidation process of the companies in detail.
The procedure for winding up the company is given under Section 270 of the Companies Act 2013. It can be initiated by:
- By the Tribunal, or
- Voluntary.
Winding up of the Company by the Tribunal
A company can be wound up based on the following points, as per the Companies Act 1956, it includes:
- Suspension of the business from one year from the date of incorporation or suspension of the business for the whole year.
- Reduction in the minimum number of members as mentioned in the Act:
- private company- 2 members
- public company- 7 members
As the new Companies Act, 2013 came into force, the above-mentioned grounds for winding up has been deleted from the Act and some other new grounds and situation for winding up are added in the Act.
As prescribed in the new Companies Act 2013, the company can be wind up by tribunal in the below-mentioned situations or circumstances:
- When a company is not able to pay debts owed by it.
- If the company by a special resolution resolves to be wind up by the tribunal.
- If a company has done some activities which are against the integrity, the morality of the nation or has threatened the security of the state or has spoiled, damaged the friendly relation with neighboring/foreign countries.
- If the company has not completed and filed its annual statement report for five consecutive financial years.
- If the tribunal itself finds or thinks that the wound up of the company is equitable and just in nature.
- When the company is involved in fraudulent, illegal activities or any other unlawful business in any way or any person from the company or management itself is connected with such formation of the company has been found guilty for fraud or any activities of misconduct.
Filing a winding up petition
Section 272 of the Act deals with the filing of winding up petition in the prescribed form number 1,2 or 3 whichever applicable to this and it has to be submitted in three sets. This petition can be presented by the company, the creditors or any contributors/contributors, the central or state government, registrar of a person authorised by central or state government for that purpose only.
While filing the petition it should be accompanied by the statement of affairs in form number 4. The petition shall state all facts up to a specific date which shall not be more before the time of making the statement. When the statement gets ready it shall be examined by a practicing chartered accountant. Then the petition shall be advertised not less than 14 days of date fixed for hearing in both English and any regional language newspaper.
Final order and content in it
After hearing the petition, the tribunal has the power to dismiss it or make an interim order of it as it thinks appropriate or it can appoint a provisional liquidator for the company till the winding-up order gets passed by the tribunal. Order for winding up is given in form number 11.
Voluntary winding-up of a company
The company can do the voluntary wind up by having mutual consent and decision of the members of the company, in the following conditions:
- If the company passes a special resolution pointing out the winding up of the company.
- If the company passes a resolution in its general meeting for winding up of the company because of the expiry of the period of its duration fixed by the articles of association or at the time of occurrence of such events where articles provide for the dissolution of the company.
Procedure for voluntary winding-up
- Primarily a board meeting has to be arranged with 2 directors by passing a resolution with a declaration given by directors that they believe that the company has no dents or it will be able to pay all its due debts by selling its assets.
- It has to issue notices for calling the general meeting for presenting a resolution accompanied by an explanatory statement.
- An ordinary resolution has to be passed in a general meeting to wind up by an ordinary or special resolution majority of ¾. Winding up will start from the date of passing the resolution.
- A meeting of the creditors has to be conducted, if the majority of the creditors believe that winding up of the company is beneficial for everyone then the voluntary winding-up can be done.
- Within 10 days of passing the resolution, a notice has to be filed with the registrar for the appointment of Liquidator.
- A notice of resolution has to be made in an official gazette and advertisement in a newspaper within 14 days of passing the resolution.
- Certified copies of ordinary and special resolutions passed in general meetings have to be filed within 30 days of the general meeting.
- Affairs of the company have to wound up and the liquidator’s account has to be prepared and also it should be audited.
- A general meeting of the company has to be conducted.
- In that meeting, a special resolution has to be passed for the disposal of books, necessary documents of the company, when all the affairs of the company are already totally wound up and it is about to be dissolved.
- A copy of accounts has to be submitted within 15 days of the final general meeting and an application has to be filed to the tribunal for the passing of an order for dissolution.
- The tribunal shall pass the order of dissolution of the Company if it thinks that the accounts are in order and all the necessary compliance have been fulfilled, within 60 days of receiving such application.
- The liquidator would then file a copy of the order to the registrar.
- The registrar then publishes the notice in the official gazette declaring the dissolution of the company, after receiving the order passed by the tribunal.
Advantages and disadvantages of liquidation of the company
Advantages of liquidation
- It takes matters at the end of an insolvent business that was struggling to cope up in an organized legal manner.
- Removes the responsibilities of the owners and directors.
- No need to file annual accounts or tax returns.
- Lifting of county court judgments or debt recovery pressure.
Disadvantages of liquidation of the company
- Restriction on business from using the same company name in future.
- Shareholders will need to repay illegal dividends.
- Loss of business reputation, trading licenses or other valuable assets.
- Administration being quicker will give benefits to creditors.
Conclusion
Therefore, as we have seen above, liquidation of the company initiates when the company becomes insolvent and bankrupt due to unmanaged business affairs and transactions, not keeping up with the trade market. When this situation comes a company voluntarily or by the order of the tribunal has to dissolve the company by following the liquidation process.
References
- https://www.mondaq.com/india/corporate-and-company-law/896544/summary-procedure-for-liquidation-companies-act-2013
- https://www.kirks.co.uk/faqs/company-liquidation/advantages-and-disadvantages-of-liquidation/
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