What is the liquidation of a company and the reason for it?

Liquidation of a company is noting but closing down the company. The name of the company will be removed from the list of the company by the registrar of the companies.
Liquidation of the company may be due to Inability to Pay Debts. Then Insolvency and Bankruptcy code 2016 will be applicable.
Any Reason Other than Inability to pay Debts. The Companies Act 2013 will be applicable.
Voluntary Winding Up. Section 59 of the Insolvency and Bankruptcy code 2016 will be applicable.

The liquidation process can be initiated by the tribunal. The reasons for this may be one or more of the following.
Winding up of a Company by a Tribunal is to be done as per section 271 of the Companies Act 2013

1. If the company has requested in a special resolution to wind up by the company by the tribunal.
2. If the company has acted against the terms and conditions, rules and regulations mentioned in Companies ACT.
3. If the company stopped filing its financial statements or annual returns from the preceding five
consecutive financial years.
5. If the company is involved in any unlawful business,
6. Any person or management connected with the formation of the company is found guilty.


Steps for Voluntary Winding-up Process of Company as per Section 59 of the
Insolvency and Bankruptcy Code, 2016
1. An affidavit declaring the solvency of the company by Majority of Directors of the
Company. The following documents are to be attached to the affidavit.
(i) Audited Financial Statement of the past two years/Since Incorporation whichever is later.
(ii) Records of Business Operations of the past two years/Since Incorporation whichever is later.
(iii) Report by the Registered Valuer about the valuation of the assets of the Company.
(iv) Latest Financial Position of the Company, if any.

2. Once the Declaration of Solvency, The closing of the company should happen within 4 weeks. An Insolvency Professional will be appointed as a Liquidator.
3. Company has also to intimate Insolvency and Bankruptcy Board of India (IBBI) within 7 days of approval of liquidation regarding

4. Within 5 days of Appointment of Liquidator:
(i) An advertisement in the form of Noice to the public in one English Newspaper and one Regional
Language Newspaper
(ii) The Public Announcement mentioned above is also to be updated on the website of the Company.
5. The Liquidator should open a Bank Account in the Name of the Company followed by the words
"involuntary liquidation" in a scheduled bank within one month of the passing of Special Resolution.
6. Intimate the Income Tax Department within One month of passing resolution regarding
Voluntary Winding-up and NOC to be obtained.
7. A Preliminary Report is to be submitted within 45 days from the commencement of the
liquidation process consisting of the following details.
(i) Capital structure of the company
(ii) Estimated values of assets and liabilities as on the liquidation commencement
(iii) Any further inquiry relating to promotion/formation/conduct of the business
(iv) Proposed plan of action by liquidator including the timeline within in which he
proposes to carry it out and the estimated liquidation costs.

8. The liquidator will verify the claims and may admit or reject. This should be done within 30 days from the last date for receipt
9. A list of stakeholders is to be made by the Liquidator within 45 days from the last date for receipt of
claims. The minutes of the meetings he has conducted with stakeholders has to be made and maintained.
10. The valuing and selling of assets is to be done by the liquidator in the manner and mode approved by the
Company and the amounts received should be deposited proceeds in Bank Account
11. The Proceeds to the stakeholders should be distributed to them within 6 months from the
receipt of amount.
12. Maintaining the accounts and auditing them is the responsibility of the Liquidator.
13. The entire process should be completed in a year. If there is a delay the liquidator should have a meeting with contributors and present an annual report. This report should have the following details.
(i) Settlement of List of Stakeholders
(ii) Details of Assets remaining to be sold
(iii) Distribution made to the stakeholders
15. Final closure report is to be made by the liquidator giving the details of Audited Accounts of Liquidation. The same should be sent to:
(i) The Registrar of Companies
(ii) The Insolvency and Bankruptcy Board of India
(iii) The Adjudicating Authority, i.e., NCLT (National Company Law Tribunal)

The preferential payment is as given below.

1. Any wages to be paid to the workmen is to be paid first. A workman is a person who is drawing less than Rs.20000/- a month.
2. Debts that are due to secured creditors.
3. All types of taxes to the government both central and state governments which are due till the liquidation is declared.
4. ESI dues.
5. Compensation to be paid to workmen as per the company act
6. PF dues, gratuity dues, and pension fund dues are to be cleared.
7. Any other payments to the employees like leave payment or any compensation to be paid as on the date of declaring the liquidation.
8. Expenses for any enquiry conducted as per 213 or 216 sections of the company act.
9. After completing the above, the remaining amount will be distributed to shareholders pro-rata.

The point wise answers to the query are as follows -

1. The primary reason for liquidation of a company is its inability to payback the loans taken from the various agencies. In such an unfortunate situation the liquidation of the company is the only available recourse as lenders will be pressing hard to get their money back.

2. Any company or corporate debtor if not able to payback even a paltry token sum of Rs 1 lakh to the creditors then it is assumed that the debtor is failing in its payback commitment and then as a first measure the creditor can start the insolvency resolution process under which there is a scope of working out a resolution plan for payback of debt. Sometimes a plan can be chalked out but many times it does not happen and then the only thing available is the liquidation. The insolvency resolution process is allowed to be done within a time of 180 days extendable by further 90 days.

3. There are two types of liquidation processes one is voluntary liquidation and other is compulsory liquidation. In case of the voluntary liquidation the liquidation process is to be initiated by the company itself through its directors under approval from its shareholders and creditors. In the case of compulsory liquidation the approval of of the National Company Law Tribunal is required. One must note that when the insolvency resolution fails the National Company Law Tribunal can give a decision for liquidation without bothering for any consent from the company or directors or share holders.

4. In case of the voluntary liquidation the company has to give certain affidavits or declarations and assure that the sale proceeds of the company will yield sufficient amount for repayment of the loans or debts. The voluntary liquidation is an out of the court method of resolving the issue. On the other hand the compulsory liquidation takes place and imposed by the National Company Law Tribunal once the insolvency resolution process fails. Even for this type of process the company or the creditors should apply for liquidation to National Company Law Tribunal under the Insolvency and Bankruptcy Code (leaving winding-up for other grounds under the Companies Act 2013). One interesting thing in this respect is sometimes if the National Company Law Tribunal is not satisfied with the resolution plan it can reject it and order for liquidation. Generally for compulsory liquidation, a time of 2 years is allowed for the liquidation process to get completed. Voluntary liquidation can be completed in lesser time also by intimating the details of sale proceeds by conducing the meeting with the creditors.

In all the above cases a liquidator is to be appointed who overseas the liquidation process and briefs the National Company Law Tribunal about it periodically. Once the liquidator takes control the power and functions of directors and employees cease to exist but they have to provide information and other help during the liquidation process.

5. The liquidation process primarily looks for the compensation or repayment to the creditors and only after that will look after the bonafide interests of others. In most of the cases the money received from the liquidation is just or even shortfalls the creditors claim and then there is nothing remaining in the kitty for others.

6. The liquidator carries out the process in great details but he has to work under the supervision of the National Company Law Tribunal only. The creditors have to present their claims to him and they are the first beneficiary of the liquidation proceeds. The remaining money will go to the depositors of money with the company if any and other vendors who have residual claims remaining unpaid.

If you are not able to sustain yourself in the market and when you are not able to pay the loan taken from banks and other financiers, the company has to take a decision to liquidate. This is a very tough decision and has to be approved through a complete process starting from the lower level to the board of the company. The company reaches such a stage where there is a problem with the company products/services that lead to poor sales and profit growth. That makes the company unable to hold the reserve and finally have to pay the debt. This if not done, gets liquidated.