Liquidation of a company is a complex process that involves an understanding of multiple aspects. It only commences after a detailed analysis of various reasons.
When a debt-laden company is no longer in a position to continue its operations, the process of liquidation is initiated. The primary goal is to wind up the company’s operations and sell its assets to settle all its liabilities and any other outstanding obligations. The decision to proceed with liquidation is typically reached when it becomes evident that the company can no longer generate profits.
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What Is the Liquidation of a Company?
In the event of a company’s bankruptcy, a liquidator sells off the company’s assets to repay its liabilities. Once the liabilities are settled, any remaining balance is distributed among the company’s shareholders.
To initiate the process of liquidation, a company must meet specific conditions and gain approval from the Adjudicating Authority. The liquidation order is granted by the Adjudicating Authority (AA) under the following circumstances:
- When a resolution plan is not received within the designated time.
- When the Adjudicating Authority (NCLT) rejects the submitted resolution plan for various reasons.
- When the Committee of Creditors (CoC) approves the liquidation of the corporate debtor.
- When the corporate debtor contradicts the approved resolution plan.
Once the Adjudicating Authority approves the liquidation order, the appointed resolution professional for the corporate insolvency process can assume the role of a liquidator. It’s important to note that the appointed resolution professional can be replaced by the Adjudicating Authority under the IBC (Insolvency & Bankruptcy Code). The liquidator must meet eligibility criteria as per the IB code and is responsible for overseeing the liquidation process until its completion.
Process of Liquidation
The liquidation process of a company begins with the systematic sale of all its assets, one by one, based on priorities and necessity. Cash and bank balances are excluded from this process.
The remaining funds are then distributed among the creditors after the repayment of liabilities. Repayment follows a predetermined order, with secured creditors taking priority. The remaining funds are used to settle preferential creditors, including government taxes and employee salaries.
After addressing the above debts, the remaining funds are allocated to pay debenture-holders, while any other miscellaneous liabilities secured by a floating charge on all assets are addressed. Unsecured creditors and preference shareholders are next in line for payment.
The final step involves determining if there is a surplus of funds after paying all the aforementioned creditors. If there is a surplus, these funds are distributed among the shareholders. In the case of a deficit, shareholders are required to pay any unpaid share of capital.
Types of Liquidation
The liquidation process is intricate and involves critical steps. Based on specific conditions and various factors, there are three main types of liquidation:
- Voluntary Liquidation: This type of liquidation is not forced by insolvency and is voluntarily initiated by the owner(s) or member(s) of the company. It indicates that the company is considered solvent and able to meet its creditor payments.
- Creditors’ Voluntary Liquidation: This type of liquidation occurs when the directors/shareholders of the company realize that it will default on creditor payments, and it does not involve court intervention.
- Compulsory Liquidation: This is a legal order from the court or adjudicating authority, declaring the termination of the company’s operations due to its inability to repay its liabilities.
Understanding the conditions, scenarios, and complexities of the liquidation process underscores the challenges involved in winding up a company’s operations. Upon successful completion of the liquidation process, the company ceases to exist as per the law.
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