Liquidation is a process of winding up of a business or a segment of the business by selling off its assets to generate cash flow and use the cash flow to pay off the creditors and all other liabilities of the business in a specific order.
In this process, the assets of the business are sold and the cash flow generated is used to pay off the liabilities of the company which leads to an end to the operations of the company and therefore the name of the company is also removed from the register of companies.
Procedure of Liquidation
The general process for liquidation of the company is as follows,
- The directors and the shareholders are furnished with documents like proof of address and identity, list of creditor details – names and addresses.
- A number of meetings of shareholders and the creditors to conduct the process.
- Appointment of insolvency professional (IP) as the official liquidator to take charge and complete the process.
- Insolvency professionals will collect the assets of the company and liquidates the same.
- Insolvency professionals will determine all the payable of the company.
- Insolvency professionals distribute the funds to the parties involved in the required order as the laws of the country.
Payments During Liquidation
The priority of payments can be as follows,
- Insolvency professional cost and cost of liquidation.
- Workmen dues and debt due (24 months) to secured creditors.
- Dues of employees other than workmen (12 months)
- Unsecured financial creditors.
- Government dues and unpaid dues to secured creditors upon realization of security.
- Remaining debts and dues.
- Preference shareholders.
- Equity Shareholders.
Types of Liquidation
#1 – Compulsory
In this case, the financial creditors appeal to the court for the liquidation of the company as they believe that the company will not be able to pay off all the debts and creditors.
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#2 – Members Voluntary
In this case, the company is solvent and therefore can pay off all their liabilities such liquidation occurs by consent of all members due to reason like completion of the purpose of formulation of company, transfer of business, etc.
#3 – Creditors Voluntary Liquidation
In this case, the company is insolvent and it himself initiates this process to avoid compulsory liquidation and court intervention in this process.
We can conclude from above that there is no intervention of the court in the creditor’s voluntary and the member’s voluntary liquidation.
- The company has no rights to dispose of the property all rights are transferred to the insolvency professional.
- The company can carry on the business only for the limited purpose of completion of the liquidation process.
- They lead to the dismissal of all the employees working with the company.
- All the rights of the directors cease to exist and transfer to the insolvency professional.
- After this, the process has completed the name of the company is removed from the registrar of companies (ROC).
After understanding about the meaning, process and consequences of liquidation we can conclude that it is a formal process in which the assets of the company are liquidated and used to pay off the liabilities which leads to an end in the operation of the company’s business and also the existence of the company comes to an end.
This has been a guide to liquidation and it’s meaning. Here we discuss procedure and types (Compulsory, Members Voluntary and Voluntary) of liquidation with their consequences. You can learn more about financing from the following articles –