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.
2.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.
Process of liquidation
The liquidator sells all assets that he deems necessary, except cash and bank balances.
The money raised in this manner is then distributed among various creditors. However, this repayment is undertaken based on a pre-established order. The first preference is given to the company’s secured creditors. The remaining money is then used to discharge preferential creditors, i.e., taxes due to the government, salaries of employees, etc.
Any outstanding amount is then used to compensate debenture-holders and other liabilities secured by a floating charge on all assets. Next, unsecured creditors and preference shareholders are paid off.
Finally, if there is a surplus of funds after all the payments mentioned above, they are distributed among shareholders. Meanwhile, in case of a deficit, shareholders are asked to pay up their unpaid share of capital.
In summary, liquidation pertains to the process of winding up and completely shutting down a company’s operations. After the liquidation process is complete, the said company will cease to exist in the eyes of the law.