How to Liquidate a Company

Nov 19, 2020
  • It is a process where a company is brought to an end. It is also known as the process of insolvency of the company. There are majorly two types of insolvencies, namely- compulsory liquidation and creditor’s voluntary liquidation (CVL). The Indian Companies Act, 2013 governs the process of winding up of a company, and the definition of ‘winding up’ is given U/S 2(94A).
  • Compulsory liquidation takes place due to non-payment of debt that is followed by a Court Order after it accepts the winding petition of the company. This is considered the last option when the company collapses under its weight.
  • The procedure followed for compulsory liquidation is initiated by filing a petition of insolvency and is governed by the Insolvency and Bankruptcy Code. This is started by either the owners or the creditors of the country.
  • Voluntary liquidation in case of a solvent company is completely voluntary and is done when the company outlives its purpose, or when the members want to cut down on taxation.
  • Voluntary dissolution of an insolvent company, however, helps the creditors to pay off debt and redistribute the remaining assets thereafter. This is done when the creditors can see that the functioning of the company is not very fruitful, and it is facing more losses than profits.

The voluntary liquidation of a company follows the given procedure-

  • The summary procedure for liquidation, given U/S 361 of the Companies Act 2013 is followed for the process of liquidation. Firstly, approval is required from the majority of the Directors of the company for the liquidation procedure. This is done by signing a board of resolution.
  • Thereafter, a special resolution is signed by the shareholders. And at least three-quarters of the majority is required to continue the process. The company’s creditors also expressly state that the company is winding up and they agree to the same.
  • Post this, a declaration is created, and a liquidator is appointed for the assessment of all the assets of the company. The report on the latest financial situation, including the capital, assets etc. are required to know the status of the company before it is dissolved.
  • Post assessment, the liquidator analyses the assets and sells them in order to dissolve all the debts of the company before its final winding up or liquidation. He/she also does all the paperwork regarding the same. Other contracts and legal disputes are also dissolved.
  • The liquidator analyses which claims should be accepted and which ones should be rejected. He/she reports about the procedure of repayment, and the fees and expenses involved in the process of liquidation to the creditors and other members.
  • Thereafter, if there is still some capital left after dissolving the entire debt of the company, it is redistributed among the members like the investors, shareholders etc. The liquidator also supervises this distribution.
  • Finally, the company is dissolved by getting its name removed from the public register at the Companies House. This is the final step, and after this, the existence of the company is ended by the liquidator, respectively.