The process of winding up a business and distributing its assets to shareholders and creditors is known as liquidation. In the event of mandatory liquidation, it may be ordered by a court or made by the company’s directors or shareholders on their own initiative. The company’s dissolution and fair debt settlement are the objectives of liquidation. The assets of the company are sold during liquidation, and the proceeds are used to pay creditors. The remaining assets could be given to the shareholders as a possible distribution. The three distinct types of liquidation, their beginnings, and the distribution of the company’s assets to creditors and shareholders are all detailed in this article.
The specific steps involved in liquidation will depend on the type of liquidation and the laws of the country in which the company is based. Liquidation can be a complicated and time-consuming process. However, Vakilsearch makes the entire liquidation procedure simple. You can count on the attorneys at Vakilsearch to keep you up to date on every stage of the liquidation process and to make sure you have all the necessary information. Additionally, the most cost-effective approaches to kicking off the liquidation process will work within your financial plan.
Liquidation by Choice:
When a company’s directors or shareholders decide to dissolve the business and wind it up, this is called voluntary liquidation. This is either an insolvent winding up, in which the business is unable to pay its debts, or a voluntary winding up, in which the business is solvent and able to pay its debts. The assets of the company are sold during a voluntary liquidation, and the proceeds are used to pay shareholders and creditors.
Liquidation on one’s own can occur:
By an ordinary resolution if the company has reached the end of its term as outlined in its articles of association or if a particular event as outlined in those articles has taken place. By a special resolution approved by the members. An advertisement in the official Gazette and newspapers must be used to make this resolution known to the public.
These are the three primary types of liquidation:
1. Voluntary Liquidation of Members (MVL): The company is solvent and able to pay its debts in a member’s voluntary winding up. To start this kind of liquidation, the directors need to say that they are solvent. Within a year of the start of the liquidation, they must pass a resolution stating that the business can pay its debts in full. A liquidator, who oversees the MVL process and distributes the company’s assets to shareholders, must also be appointed by the directors. Know more about Voluntary Winding up of company
2. Voluntary Liquidation by Creditors (CVL): The company is insolvent and unable to pay its debts in a creditor’s voluntary winding up. In this instance, a resolution for the company’s winding up must be approved at a meeting of the creditors. A CVL is available to both solvent and insolvent businesses, in contrast to a member’s voluntary liquidation (MVL), which is only available to solvent businesses. However, insolvent businesses that are unable to restructure or reorganize their debts and are forced to liquidate their operations in order to pay their creditors are the most common users of this strategy.
3. Forced or Obligatory Liquidation: A type of liquidation known as compulsory or forced liquidation takes place when a company cannot pay its debts and a court orders the company to be wound up and its assets sold. A creditor, a business, or the government can start a compulsory liquidation.
A liquidator is appointed by the court in compulsory liquidation to oversee the sale of the company’s assets and distribution of the proceeds to creditors. In order to wind up the business, the liquidator has the authority to sell the company’s assets, sign new contracts, and make any other necessary adjustments.
After the creditors have been paid, any assets that remain may be given to the shareholders. However, the shareholders may not be compensated because the proceeds from the sale of the company’s assets may not be sufficient to satisfy all creditors. The laws of the country where the company is based will determine the specific procedure for compulsory liquidation.
In India, the following documents are required for a company’s liquidation:
The Insolvency and Bankruptcy Code (IBC) governs the liquidation procedure in India. To begin the liquidation process, the following documents may be required under the IBC:
A copy of the board of directors’ business PAN Resolution to begin the process of liquidation; a copy of the company’s memorandum and articles of association; a list of the company’s creditors and the number of their claims; a list of the company’s assets and liabilities; a statement of the company’s affairs; a statement of the company’s financial position; and a report from the company’s auditor on the company’s financial affairs.
The objective is to distribute the company’s assets to its creditors and shareholders in a fair and orderly manner, regardless of the type of liquidation. The type of liquidation and the laws of the country where the business is based will determine the specific liquidation procedure.