What Is Liquidation of a Company?

 When a company is being liquidated, it needs to understand multiple aspects of the process before it can begin to work. The process starts working only after detailed analysis of various reasons is completed. Now let's find out what those reasons are. 


 

In a situation where a company is heavily in debt and unable to function anymore, this process of liquidation of a company can be initiated at that time. In the end, the purpose of winding down the company's operations and selling its assets is to cover all of the company's liabilities and to make sure any other obligations are met as well. Ascertainment of the fact that the company is no longer in a position to profit is the decisive factor in determining whether or not the liquidation process has been successful.  

 

There are a number of causes that can contribute to a company's liquidation, depending on what the main reasons are, but in most cases there is insolvency, which is the unwillingness of the company to continue operating in a profitable manner or even incapacity to do so.

liquidation of a company

After the business goes bankrupt, the liquidator simply sells off the company's assets to pay off the company's creditors once the company's creditors have been paid off, a positive balance is then distributed among the shareholders of the company.

 

In order to initiate the liquidation process of a company, the company must qualify for certain conditions and then it will have to be approved by the adjudicating authority (AA). Therefore, the Judiciating Authority (AA) will sanction the liquidation order in the following cases:

 

  • A resolution plan will not be accepted if it is not received within a specified period of time

  • There may be a number of reasons to the rejection of the resolution plan submitted by the adjudicating authority (NCLT).Liquidating a company will take place if the Committee of Creditors (CoC) approves the liquidation of the company.

  • When the corporate debtor contradicts the resolution plan that has been approved by the board of directors.


It is the appointed resolution professional for the particular corporate insolvency process who will be responsible for fulfilling the role of a liquidator once the adjudicating authority approves the liquidation order for further processing. Throughout the course of the IBC (Insolvency and Bankruptcy Code), it is mandatory for the appointed resolution professional to be replaced at any time by the adjudicating authority. It is a must that it be very clear that the liquidator must be qualified according to the IB code and he/she should be able to take advantage of the position until the liquidation process has been completed. 

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Liquidation process:


As part of the liquidation process of a company, each asset will be sold off one by one in accordance with the priority and necessity as determined by the understanding of the company. It is important to note that cash and bank balances of the company will not be sold off during this process.

 

In the end, once the liabilities have been repaid, the remaining amount will be distributed among the distributors. However, the order in which these repayments are completed is predetermined. Priority is given to the secured creditors of a company, and the remaining money will then be used to discharge preferred creditors, such as government taxes and employee salaries.

 

There has to be a set period of time after the repayment of the above debts have been completed, so that the remaining amount can be used to pay off the debenture-holders and any other miscellaneous obligations may be secured by a floating charge against all assets. The next step would then be to pay off any unsecured creditors and preference shareholders.

 

Upon completion of all the payments that have been made to the above mentioned creditors, the final step will be to determine whether the funds are in surplus. If the funds are in surplus, then the funds will be distributed among shareholders. Conversely, in the case of a deficit, the shareholders will have to pay up the share of capital that is unpaid. 

Liquidation Types:

This makes liquidation a very time-consuming process, and it requires a number of crucial steps that have to be taken in order to complete it. But based on the condition of the product, as well as a number of other variables, here are the three types of liquidation that you must know about:

 

  • Voluntary liquidation: 

  • The company is liquidated voluntarily by the owner(s) or member(s) of the company, and this type of liquidation is not triggered by the insolvency or triggered by the court. This is an indication that the company is solvent and is able to make payment to its creditors as soon as possible.


  • Creditors’ voluntary liquidation:

  • The directors/shareholders of the company may decide to create this type of liquidation if they realize that the company will fail to pay its creditors and there will be no court involvement in this process.


  • Compulsory liquidation:

  • It refers to the situation which is officially declared by a court of law or a court of adjudication that the business is to cease operations and that it will close down as a result of the inability to repay its debts.

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