Modes of liquidation of company
What is liquidation of company ?
Liquidation of company happens when company gets insolvent and is dissolved by legal procedure . In simple words, its liabilities are more than its assets. During liquidation, shareholders and creditors gets assets. In liquidation process, priority list is followed. Liquidation may be either compulsory or Voluntary. Court also appoints official liquidators for carrying out the liquidation process. Liquidator represents interest of all creditors and shareholders. In finance and economics, it is an event that usually occurs when a company becomes insolvent as it cannot pay its obligations when they become due. Liquidation is also known as winding up of company.
What are the modes of Liquidation?
Following are the two modes for liquidation:
1. Compulsory Liquidation.
2. Voluntary Liquidation.
When company gets liquidated by court order then it is said to be compulsory liquidation of company. If company is unable to repay creditor’s money then they can file petition in high court for compulsory liquidation. Court also appoint official liquidator to look into the liquidation process.
who looks after liquidation process ?
The court appoints official receiver to handle liquidation process. The official receiver acts in interest of shareholders and creditors. They have to realise assets of company, pay the fees and other charges of liquidation and pay the remaining of creditors. surplus available is distributed to shareholders. Official receiver is a civil servant and an officer of the High Court. Insolvency practitioner can also handle the liquidation process. They are accountants or solicitors and works in private sector.
Why compulsory liquidation / winding-up?
Following are reasons for liquidation of company:
- High court should order liquidation.
- A public limited company is registered for more than a year without trading certificate.
- Is an ‘old’ public company
- It has not begun trading within a year of its incorporation or has suspended its trading for a whole year
- It has only one shareholder.
- cannot pay its debts
- If court thinks it is just and equitable.
Who can file petition for liquidation?
Following are the persons who can file petition:
- The Company [Sec. 439(1) (a)];
- Any Creditor [Sec. 439(1) (b)];
- By any Contributory [Sec. 439(1) (c)];
- A Registrar [Sec. 439(1)(e)];
- Any person authorized by the Central Government [Sec. 439(1) (f)].
What are the grounds of liquidation?
Following are the grounds for liquidation:
- Special resolution for liquidation.
- Default in complying with requirements.
- Suspends its business for whole year.
- Reduction in membership (Falls below the given limit).
- Unable to repay debts.
- Courts thinks just and equitable.
Voluntary Liquidation of company:
The Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“New Regulations“) on March 31, 2017. Limited liability companies can also initiate liquidation itself. As per Section 59 of the Insolvency and Bankruptcy Code, 2016, a company who intends to liquidate voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of Chapter V of the Code.The New Regulations provides the process for initiating voluntary liquidation by a corporate person i.e. companies, limited liability partnerships and any other persons incorporated with limited liability.
The erstwhile Companies Act 1956 and Companies Act 2013 had 38 and 20 sections dealing with voluntary liquidation. Now new regulation 2017 has replaced it.
how will Liquidation of company take place?
- By an ordinary resolution in General meeting
- By special resolution ( by all member of company)
Tpyes of Voluntary liquidation/ winding up :
- Members voluntary liquidation.
- Creditor’s voluntary liquidation.
1. Member’s Voluntary Liquidation :
If the company is able to pay its debts and the directors make a declaration to that effect;then it is a Members’ Voluntary Winding-up. The declaration must also be verified by an affidavit.
The declaration must be:
(a) Made within the five weeks immediately preceding the date of passing of the resolution of winding-up by the company and delivered to the Registrar for registration before that date; and
(b) Accompanied by a copy of the report of the auditors of the company on the Profit and Loss Account of the company from the date of the last Profit and Loss Account to the latest practicable date immediately before the declaration of solvency, the Balance Sheet of the company; and a statement of the company’s assets and liabilities as on the last mentioned date.
2. Creditor’s Voluntary Liquidation:
If the company is unable to prove their solvency then it is presumed that company is insolvent. In that case, creditors passes special resolution for winding up.
Following steps are listed down for liquidation:
(i) Pass special resolution.
(ii) There must also be a meeting of creditors after general meeting.
(iii) Appointment of liquidators.
(iv) A committee of inspection.
(v) The work of winding-up according to statute.
3. Voluntary Winding under the supervision of court:
At any time after a company has passed a resolution for voluntary winding-up, the Court may also make an order that the voluntary winding-up shall continue but subject to the supervision of the court (Sec. 522). The order is made in interest of creditors and also contributories.