Liquidation Of A Company

What is Liquidation Of A Company?

In its simplest form liquidation is a formal process which brings about the closure of a limited company. Any outstanding debts owed by the company will be written off unless the director has personally guaranteed these borrowings.
As part of the process all company assets will be sold – or ‘liquidated’ – for the benefit of outstanding creditors and/or shareholders before the company is struck off – or dissolved – from the register held at Companies House. Once this has happened the company will cease to exist as a legal entity.

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.
Therefore, any company that wishes to be only an asset company or have no significant business activities can apply and become a dormant company.

Kinds of liquidation

There are three basic types of liquidation enumerated below:
• Voluntary liquidation: This type of liquidation is not forced by insolvency and is voluntarily decided by the owner(s)/member(s) of the company. This means that the company is still solvent and can make payments to creditors.
• Creditors’ voluntary liquidation: This is brought about when the director/directors realize that the company will default on creditor payments. Shareholders are asked to vote; consequently, if 75% of the members agree to do so, the company is liquidated.
• Compulsory liquidation: The court of law orders the business to terminate its operations and close down when the company is unable to repay its liabilities.
Voluntary winding up of a company can be initiated at anytime by the shareholders of the company. In case there are any secured or unsecured creditors or employees on-roll, the outstanding dues must be settled. Once all the dues are settled, the bank accounts of the company must be closed. Finally, the company must regularise any overdue compliance like income tax return or annual filing and surrender the GST registration. Once, all activities are stopped and the registrations are surrendered, the winding up application petition can be filed with the Ministry of Corporate Affairs.

Reasons to Winding Up of a Company

• Avoid Compliance
A company is a legal entity and a juristic person established created under the Companies Act. Therefore, a company is required to maintain regular compliance throughout its lifecycle. Winding up process can be to close a company that is not active and avoid compliance responsibilities.

• Avoid Fines
A company that doesn't file its compliance on time incurs fines and penalty including debarment of the Directors from starting another Company. Hence, it is better to officially wind up a company that is inactive and avoid potential fines or liabilities in the future.

• Low Cost
When compared to maintaining compliance for a dormant company, it might actually be cheaper to wind up a company and incorporate again when the time is right.

Rules for winding up a Company

• Board meetings should be convened for the approval of winding up a company.
• A notice should be issued in written form for convening a general meeting to pass a resolution on the winding up procedure.
• An appointment of an official liquidator or insolvency professional should be made.
• The income tax department should be acknowledged with respect to the resolution passed at the meeting for voluntary winding up of the company.
• Simultaneously, the No Objection Certificate (NOC) should be obtained from the Income tax department.
• If the creditors are in majority, then the creditors meeting should be conducted to approve the resolution passed in the general meeting; given that creditors are owed 2/3rd of the company debts.
• Before initiating a wind up process, an intimation should be conveyed to the Insolvency and Bankruptcy Board of India (IBBI) within 7 days from the date of approval of the resolution.
• An announcement should be made to the public within 14 days of passing the wind up a resolution in an official gazette, one english newspaper, and one local newspaper, where the registered company has been located.
• The whole winding up the process should be completed within 12 months from the initiation of the liquidation.

REQUIRED DOCUMENTS :

• PAN card of the company
• Certificate of closure of the company's bank account
• Latest statement of company accounts
• Statement of accounts related to all assets and liabilities of the company, audited by Chartered Accountant (CA)
• An indemnity bond, which should be notarized by the directors
• Proof of approval of the resolution by 3/4th of board members
• Application for removing the name of the company