In finance and economics, liquidation refers to the process of liquidating or terminating a business or firm. The allocation of assets to claimants or among shareholders is also part of the firm liquidation procedure. It is an occurrence that generally occurs when a firm declares itself insolvent, which means it is unable to fulfil its debts by the due date. As all firm operations come to an end, the remaining assets are utilised to pay or reimburse creditors and stakeholders in the order of their claims.
The question, ‘what is company liquidation?’ may therefore be answered as the process of liquidating a firm while settling all obligations with the aid of its assets is known as company liquidation.
What Exactly Is Liquidation?
In banking and economics, liquidation is the process of closing a firm and allocating its assets to claimants. It is an occurrence that generally occurs when a firm is insolvent, which means it is unable to fulfil its commitments on time. As the company’s activities come to an end, the residual assets are utilised to pay creditors and shareholders in the order of their claims. General partners are at risk of liquidation.
The term liquidation may also refer to the sale of poor-performing items at a price lower than the cost to the firm or lower than the price desired by the business.
if your business running under financial crisis in that situation business owner should take government scheme helps by registering their business under the udyam registration portal, and also care in project report for getting bank loan from financial institutions.
Company Liquidation Processes in India
When studying what is company liquidation or understanding the business liquidation process and procedure in India, you must be aware of the three various forms of company liquidation process.
Voluntary Liquidation of Members (MVL)
Members’ Voluntary Liquidation is a sort of solvent liquidation that is typically utilised when a director wishes to retire or when the firm has run its course and is no longer useful.
This form of business liquidation is overseen by a certified official known as an insolvency practitioner (IP), who ensures that all legal requirements of the company liquidation process and procedure are followed. They sell the company’s assets, pay off its creditors, and distribute the leftover earnings to shareholders in proportion to their share or investment.
Because the money received on the dissolution of the assets is taxed as capital rather than revenue, an MVL can be one of the most tax-efficient methods to close a corporation. However, this depends on a variety of criteria, including whether you and your future business plans qualify for Entrepreneurs’ Relief.
This sort of liquidation is launched by one or more creditors who have not been paid in full. If the court grants a winding-up order, corporate assets are sold to benefit creditors, and the firm is forced to close.
This is the most severe type of firm liquidation, and all employees are terminated. The liquidator will also conduct a thorough examination into the directors’ activities to establish whether they were responsible for the company’s bad financial state.
Voluntary Liquidation of Creditors (CVL)
A Creditors’ Voluntary Liquidation finally leads to the company’s demise, with assets auctioned to pay off creditors as far as practicable. The board of directors has the right to select a licenced IP to handle the business liquidation procedure in India. Although an investigation into their acts is conducted, directors are found to have prioritised their company’s creditors by voluntarily declaring liquidation.
The business’s creditors vote on the CVL request, and if 75% or more (by debt value) vote yes, the decision becomes legally binding for all parties, and the corporate liquidation procedure can begin.
One significant advantage is that the directors are eligible for statutory redundancy. This might be used to pay professional expenses, refund part of the company’s liabilities, or offer short-term financial support to the directors.
For a better understanding of a company’s voluntary liquidation, below is a step-by-step method that it must follow:
STEP 1: The Board Declares Solvency
The board of directors must issue a statement or announcement of solvency in the form of an Affidavit stating the following:
The corporation did not default on any debt repayments.
The firm is solvent and will be able to pay its creditors with the assets liquidated through the voluntary liquidation procedure.
The liquidation is not being carried out with the intention of defrauding any individual or individuals.
STEP 2: Engage the Services of a Company Insolvency Professional
The board of directors must identify and designate an insolvency practitioner to act as liquidator. This person must be registered with the Insolvency and Bankruptcy Board of India and understand the complete voluntary liquidation process under the IBC.
STEP 3: Schedule Stakeholder Meetings
The board must call a meeting of shareholders within four weeks of declaring solvency, and the following resolutions must be enacted at the meeting:
Decision on the appointment of a liquidator for the corporation
Special resolution for voluntary liquidation of the business
STEP 4: Submit Resolutions to the Registrar of Companies and the IBBI
STEP 5: A Liquidator is appointed to manage the company.
STEP 6: Make a Public Declaration of Solvency
How Does the Udyam Aid in Voluntary Liquidation Under the IBC?
Udyam Corporate Consulting’s bankruptcy services offer you with expertise gained through years of experience by our financiers and advisors. Because our insolvency and bankruptcy experts have considerable experience working with customers from all around the world, you can be confident that the help and counselling offered will be organised in accordance with the numerous legal compliances, udyam registration and regulations.
Udyam Corporate Consulting considers you a business partner rather than a client. As a result, we offer the finest IBC advising services and assist you in learning more about the various forms of voluntary winding up. Making certain that our main priority of serving your company demands is met. Contact us for a better understanding of our Voluntary Liquidation services or any other financial advising service!
In summary, liquidation refers to the process of winding up and entirely ceasing activities of a corporation. The corporation will cease to exist in the perspective of the law once the liquidation procedure is completed.