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Liquidation of a company is the process of winding up a business by selling off its assets to repay creditors and distributing any remaining funds to shareholders. This marks the formal closure of a company. Liquidation typically occurs when a company is insolvent, meaning it is unable to meet its financial obligations. The liquidation process can be initiated voluntarily by the company’s shareholders or compulsorily by a court order. Once the process is complete, the company ceases to exist as a legal entity.
Board Resolution:-
Convene a Board Meeting to pass a resolution for voluntary winding up of the company.
Appoint a liquidator for the process (if applicable).
Declaration of Solvency:–
Directors must make a declaration of solvency stating the company can pay its debts within a specified period, typically within one year.
General Meeting (Special Resolution):–
Call a General Meeting or Extraordinary General Meeting (EGM) to pass a special resolution for winding up.
Approval from at least 75% of the shareholders is required.
Creditors’ Meeting:–
Hold a meeting with creditors to approve the winding-up resolution and liquidator’s appointment (if applicable).
Obtain consent from the majority of creditors.
File Resolution with Registrar of Companies (ROC):–
Submit the special resolution for winding up with the ROC in Form MGT-14 within 30 days.
File a notice for the appointment of a liquidator (Form GNL-2).
Appointment of Liquidator:-
Appoint an official liquidator, who will take charge of the company’s assets and liabilities.
The liquidator will submit reports to the ROC and the court, if applicable.
Publication of Resolution:-
Publish the winding-up resolution in the Official Gazette and at least two newspapers (one in English and one in the local language).
Settle Outstanding Liabilities:–
The liquidator will pay off all outstanding liabilities, including creditors, taxes, and employee dues.
File the liquidator’s statement of accounts and affairs with the ROC.
Debt Resolution:-
Liquidation allows for the structured repayment of outstanding debts, helping to relieve the financial burden on the company and its directors.
Orderly Asset Distribution:-
Liquidation ensures that company assets are distributed fairly among creditors, shareholders, and other stakeholders.
Legal Protection:-
Once the company is liquidated, legal actions from creditors are halted, providing protection against lawsuits and other legal proceedings.
Closure of Insolvent Operations:-
Liquidating an insolvent company prevents further financial losses and allows for a clear exit from non-viable business operations.
PAN card for the business
Closing statement for the business’s bank account
A notarised indemnification bond that the directors must execute
Most recent financial statement for the business
Accounts that include all of the company’s assets and obligations that have been reviewed by a Chartered Accountant (CA)
Proof that at least 3/4 of the board members have approved the resolution.
Application to change the company’s name.
Secured creditors, such as banks and financial institutions, have the first priority. They are entitled to recover debts from the sale of assets pledged as security against their loans.
Expenses incurred during the liquidation process, including liquidator fees and legal expenses, are settled next.
Employee claims for unpaid wages, salaries, and workmen's dues are given priority after secured creditors and liquidation expenses.
Unsecured creditors, including trade creditors and suppliers, are paid from any remaining assets after secured creditors and employee claims have been settled.
Taxes and other statutory dues owed to the government, such as GST, income tax, or other regulatory fees, are prioritized after unsecured creditors.
After all debts and claims have been settled, any surplus is distributed among shareholders, with preference given to holders of preference shares before common shareholders.
Inability to Pay Debts:
If a company is unable to pay its debts, creditors can petition the Tribunal (NCLT) to order its compulsory winding up.
Resolution by Tribunal:
A company can be compulsorily wound up if the Tribunal deems it just and equitable due to reasons like mismanagement, fraud, or loss of business purpose.
Failure to Commence Operations:
If a company fails to commence business within one year of incorporation or suspends business activities for an entire year, it may be subject to compulsory winding up.
Statutory Violations:
Breaching regulatory provisions, such as failing to file annual returns or maintain proper accounts, can lead to compulsory winding up by the Tribunal.
Company’s Request:
A company itself can apply for compulsory winding up if it cannot continue operations due to insolvency or other valid reasons.
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