Company Dissolution or Winding up of a company means a procedure by which a corporate is dissolved or liquidated. With this process, the assets are disposed of to pay off the liabilities and the surplus. All the assets are distributed among shareholders/members in a proportion to their shareholding and the amount of debt with the company. Wind-up proceedings are governed under the norms of the Companies Act 2013 and also under the IBC 2016.

• Liquidation of firm under the IBC, 2016.
• Wind-up under the Companies Act, 2013 by NCLT.
• Removal/Striking off corporate’s Name from RoC.

In the following sections, we will understand the basic nuances of all these three methods of winding up a corporate and their associated business. 

Dissolution Under IBC 2016

A) Voluntary Liquidation of a Corporate (Section 59 of the Codes)

• A firm that intends to liquidate itself voluntarily to pay off its debt can initiate voluntary liquidation proceedings under the norms of the Insolvency and Bankruptcy Code 2016.
• The voluntary Liquidation procedure of a corporate person who is registered as a company, must meet the subsequent conditions:

1. A declaration signed by a majority of the administrators of the corporate verified through an affidavit that states-

• They have conducted a full investigation into the affairs of the corporate or corporate person and they have come to an opinion that either the corporate has no debt or that it will be ready to pay its debts completely from the proceeds obtained by liquidation of its assets during the voluntary liquidation of company.
• the corporate liquidation is not taking place with an intention to defraud any person.

2. A declaration under the sub-clause (a) must be accompanied with the subsequent documents—

• audited financial statements of the firm and record of business operations of the corporate from previous two years or since its incorporation, whichever is later;
• A report on the valuation of the assets of the corporate prepared by a registered valuer;

3. within four weeks of a declaration as per sub-clause (a), there must be—

• A special resolution from the members passed in a general meeting stating that the corporate needs to be liquidated and appointment of an insolvency professional is needed for the same; or
• A resolution from the members passed in a general meeting stating that the corporate needs to be liquidated voluntarily because the last due date of paying the dues has expired.  The Resolution should also state that debt resolution through asset resolution must take place via an insolvency professional.

In case of a corporate owing any debt to a person, its creditors who represent two-thirds of the value of the debt owed by the corporate must approve the resolution under sub-clause (c) within 7 days passing from the General Meeting.

4. The corporate must notify the Registrar of Companies (RoC) and the Board (IBBI)   regarding the resolution to liquidate the corporate within 7 days of spasming from the General meeting or the day after approval from the group of creditors (whichever is the case applicable).

5. Subject to approval by the creditors (if needed), the voluntary liquidation procedure related to a firm shall be deemed to have commenced from the date of passing of liquidation resolution.

• The norms of sections 35 to 53 of Chapter III and Chapter VII will apply to voluntary liquidation procedures for corporate people with such modifications as are necessary.
• Where the objectives of the corporate are completely unaffected and its assets are completely liquidated, the liquidator should make an application with the Adjudicating Authority to dissolve such a corporate.
• On receipt of an dissolution application by the liquidator, the Adjudicating Authority must pass an order that the debtor firm should be dissolved from the date of order.
• a replica of an order passed by the Adjudicating Authority should be forwarded within 14 days from the date of order to the authority with which the company is registered.

B) Liquidation Procedure if a Corporate has made default in debt payment

• The norms related to insolvency and liquidation of corporate debtors will be applicable only if the quantity of the debt is Rs. 1 Lakh or more. However, the Central Government has increased the minimum amount of default by notification to Rs. 1 Crore or more.
• Where any corporate debtor commits a default in debt payment, a creditor (financial or operational) or the debtor itself may apply to initiate Corporate Insolvency Resolution Process (CIRP) through an application to the Adjudicating Authority.
• A financial creditor either by himself or jointly with any other financial creditor may file an application under section 7 of the IBC. On the other hand, an operational creditor must first serve demand notice to debtor demanding repayment of the operational debt as per the agreement. This rule is as per section 8 and the Operational creditor has to file the application under section 9 of the IBC.
• The Corporate Insolvency Resolution Process (CIRP) should be completed within a period of 180 days from the date of acceptance of the application. Although, such period could be extended to a maximum of 90 days if a resolution for the same has been passed at a gathering of the committee of creditors (CoC) by seventy-five percent voting shares.
• On receiving the application, the adjudicating authority can take the following decision by an order- (a). declare a moratorium (b) make a public announcement initiatiating CIRP and submission of claims; (c). Announce the appointment of an Interim Resolution Professional (IRP).
• The Interim Resolution Professional (IRP) will manage the whole operation of the debtor company and exercise the rights of the Board/Partners. He will collect all claims received against the debtor company and constitute a CoC (Committee of Creditors).
• The CoC will comprise of all the financial creditors, who in their first meeting will come up with a resolution plan for the debt. The plan must keep the interest of all the involved parties intact.
• The Resolution Professional will submit the resolution plan from the CoC, which must be submitted within the prescribed timeline or else it maybe rejected by the Tribunal. In case the tribunal rejects the resolution plan due to any reason, it can order the liquidation of the corporate as per appropriate procedure laid down within the IBC to resolve the debts owed by the corporate debtor.

Removal/Striking off Company’s Name from RoC

1. A company can be dissolved by the Registrar of Company (RoC) on suo motu basis, if it has reasonable grounds to believe that:

• The company has not commenced its business within one year of obtaining its incorporation certificate.
• The company has not carried on any business or operation for the previous two fiscal years and has not made any application within that period to obtain the status of a dormant company under Section 455. In such a case, ROC sends a notice to the corporate and each one of its directors asking them the reason to stop the operation of the company and applying for dormant status. It will requesting them to send their answers alongside relevant documents within 30 days from the date of receiving the notice.
• If the subscribers to the memorandum haven’t paid the requisite subscription amount which they had undertaken for payment at the time of company incorporation and a declaration to the present effect has not been filed within 180 days of incorporation; 
• The company is found to be inoperative or dormant during the physical verification carried on at the registered office of the corporate by the RoC.

2. The dissolution can also be carried by the corporation itself by filing of an application with the RoC on all or any of the grounds mentioned in point 1. If a corporation opts to get rid of its name on suo motu basis (on any or all grounds mentioned in option 2), it can be done by following the steps summarized below-

a) A Company (after extinguishing all its pending liabilities) can pass a special resolution or take consent of seventy-five per cent of the members in paid-up share capital.

b) File an application to RoC for removal of its name by filing eForm STK-2 alongside the requisite fee of Rs. 5,000 and the document prescribed in the list of RoC.

• A No Objection Certificate (NOC) from a regulatory body under whose regulation the company was operating. For example, an NBFC has to file a NOC from the Reserve Bank of India. 
• Indemnity bondS duly notarized by every director of the firm in Form STK 3.
• A press release of accounts having assets and liabilities of the corporate accumulated 30 days before the date of application. The press release must be authorized by a Chartered Accountant.
• An affidavit in the format of the Form STK 4 by every director of the company;
• Copy of the special resolution certified by each administrator of the corporate with the consent of seventy-five percent of the members of the corporate. The certification must be given in terms of the paid-up share capital as on the date of application.
• A press release related to pending litigations, if any, involving the corporate.

On receipt of an application, the registrar will issue a public notice in Form STK-6 and place it on the MCA’s website and the company’s website. They should also publish it in the newspapers and also issue an Official Gazette for the knowledge of the public.

The Registrar of Companies (RoC) will simultaneously intimate the related regulatory authority under whose regulation the corporate was working. This includes income-tax authorities, RBI, SEBI, central excise authorities, IRDAI, and service-tax authorities.

Upon expiration of the time mentioned within the notice, if no objection is received on its part, the Registrar will cross off the name of the company from its record. It will publish notice of the same in the Official Gazette and post-publication of the notice, the corporate will remain dissolved.

Dissolution by the Tribunal under the Companies Act

Section 271 of the Companies Act has laid down the situations in which the firm can be dissolved by the tribunal:

• If the corporate itself has resolved through some special resolution that the corporate should be liquidated by the Tribunal.
• If the corporate has in any way acted against the interests of the sovereignty or integrity of India. Even if the corporate is found guilty of harming the safety of the State, public order, relations with foreign States, decency or morality of the society it can be dissolved through order of the Court.
• If an application made by the Registrar or any other government authorised person or institution releases notification against a company that has conducted fraudulent operations, then the Tribunal can order its dissolution. 
• If the corporate has made a default in filing of essential documents like its financial statements or annual returns to the RoC for preceding three fiscal years consecutively.
• If the Tribunal is of the opinion that it’s just and equitable that the corporate should be aroused

Section 272 of the Companies Act, clarifies the list of entities who are entitled to file a petition for the dissolution of a firm:

• The company promoters.
• Any contributor or contributories ( partly/fully paid-up stakeholder).
• All or any of the people laid out in clauses (a) and (b).
• The Registrar from RoC.
• A person authorised by the Central Government to carry out the job on their behalf.

How to File the Petition for Dissolution?

A Petition presented by the corporate shall be admitted and a press release is given to inform the public affairs. The Tribunal after careful examination of the petition, the court will decide the fate of the petition. Within 90 days from the date of presentation of the petition, the tribunal may pass any of the subsequent orders:

• Dismiss it, with or without any costs;
• Appoint a provisional liquidator for the corporate till the release of final order.
• Pass an order for the dissolution of the corporate with or without any costs;
• Any other order deemed fit.
• The Tribunal at the time of the passing of the order of liquidation, shall appoint a Liquidator or the Liquidator who will be amongst the Insolvency Professionals registered under the IBC 2016. 

So, that was everything to know about how a company gets dissolved in the Indian financial sector. Out of these ways, company dissolution through insolvency is considered the best and easiest to pay off the debt. The insolvency procedure must be taken care of under the supervision of a legal company. The IBC is also used to recover money from other debtors. Companies can opt for legal consultation before moving on with the process of insolvency for debt recovery. For a company being struck off from RoC but not dissolved, there are legal ways to revive the business. Find a good legal and financial consultant if you want to revive your business or just want to consult regarding insolvency procedure.

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1. What Is Liquidation?

Liquidation refers to the formal process of closing a company by selling its assets to pay off liabilities. Once all obligations are settled, any remaining funds are distributed to shareholders, and the company ceases to exist.

Types of Liquidation

1. Voluntary Liquidation: Initiated by the company’s decision when it cannot pay its debts (creditors’ voluntary liquidation) or when it’s still solvent (members’ voluntary liquidation).
2. Compulsory Liquidation: Court-ordered liquidation, typically initiated by creditors or regulatory authorities.

Key Features of Liquidation

• Governed by the Insolvency and Bankruptcy Code (IBC), 2016 in India.
• Managed by a liquidator, who oversees asset sales and creditor payments.
• Aimed at maximizing returns for creditors while ensuring compliance with legal processes.

2. Distribution of Assets During Liquidation

The liquidation process prioritizes creditors based on their claims and legal standings. The IBC, 2016 specifies the following hierarchy:

Priority of Claims

1. Secured Creditors: Lenders with collateralized loans are paid first from the proceeds of the pledged assets.
2. Unsecured Creditors: Includes suppliers, employees, and other parties without collateralized claims.
3. Government Dues: Outstanding taxes, penalties, and other statutory dues are settled after creditors.
4. Equity Shareholders: Shareholders receive funds only if all prior obligations are met.

Steps in Distribution

1. Asset Valuation: Assets are appraised to determine their market value.
2. Asset Liquidation: Assets are sold to recover funds for debt repayment.
3. Debt Settlement: Creditors are paid according to the priority list.

3. Possible Consequences for Directors During Company Liquidation

Liquidation has far-reaching consequences for directors, particularly in cases involving insolvency. Their responsibilities and actions are scrutinized during this period.

Director Responsibilities

1. Ensuring Transparency: Directors must disclose financial information to the liquidator.
2. Ceasing Business Activities: Operations must halt to prevent additional liabilities.
3. Avoiding Fraudulent Transactions: Engaging in dubious practices during liquidation can lead to legal actions.

Legal Consequences

• Disqualification: Directors may face disqualification under Section 164 of the Companies Act, 2013, if found guilty of misconduct.
• Liability for Wrongful Trading: Directors can be held personally liable for debts incurred after insolvency is apparent.
• Fraudulent Preferences: Transactions favoring certain creditors over others can attract penalties.

Rights of Directors

While responsibilities increase, directors retain certain rights:

• To attend creditor meetings.
• To appeal liquidation decisions if deemed unjust.

4. Example of Liquidation

Understanding liquidation is easier with real-world scenarios. Here’s a simplified example:

Case: XYZ Industries

XYZ Industries, an electronics manufacturer, faced financial difficulties due to declining sales and increased competition. The company failed to meet its debt obligations, prompting creditors to file for liquidation under the IBC.

1. Trigger: Creditors initiated insolvency proceedings.
2. Liquidator Appointment: A liquidator was appointed by the National Company Law Tribunal (NCLT).
3. Asset Sale: The company’s assets, including machinery and inventory, were sold at auction.
4. Debt Settlement: Proceeds were distributed to secured and unsecured creditors based on priority.
5. Closure: Remaining funds were distributed among shareholders, and the company was officially dissolved.

Key Learnings:

• Liquidation is often the last resort.
• The process ensures creditors receive maximum recoveries.
• Legal compliance at every step is critical.

5. Liquidation: Important Points to Consider

Liquidation involves multiple stakeholders, each with distinct interests. Proper planning and professional advice can mitigate risks and improve outcomes.

Important Points for Companies

1. Timely Action: Delaying liquidation can lead to greater financial losses.
2. Accurate Records: Maintain up-to-date financial records to simplify the liquidation process.
3. Compliance: Adhere to the IBC and other applicable regulations.

Important Points for Creditors

1. Claim Submission: Creditors must submit claims promptly to be considered during the liquidation process.
2. Recovery Expectations: Understand recovery may be partial, depending on the asset base.

Important Points for Shareholders

1. Understand Priority: Shareholders are last in the payout hierarchy.
2. Engage Early: Actively participate in proceedings to ensure transparency.

6. Tax Implications and Financial Impact of Liquidation

Liquidation has significant tax and financial consequences, which vary based on the nature of the liquidation.

Tax Implications

• For Companies: Sale of assets may attract capital gains tax.
• For Creditors: Recovered amounts may be taxable as income.
• For Shareholders: Distributions may be subject to dividend tax.

Financial Impact

1. Credit Score Impact: A liquidated company’s directors and related entities may face a drop in creditworthiness.
2. Asset Depreciation: Assets sold during liquidation often fetch lower market values.
3. Market Reputation: The company’s reputation may be tarnished, affecting future ventures.

FAQs About Liquidation`

1. What is Liquidation?

Liquidation is the formal process of winding up a company’s operations by selling its assets to settle debts and obligations. Once the process is completed, the company ceases to exist.

2. What are the types of liquidation?

1. Voluntary Liquidation: Initiated by the company itself. It can be:
   • Members’ Voluntary Liquidation (MVL): For solvent companies.
   • Creditors’ Voluntary Liquidation (CVL): For insolvent companies.
2. Compulsory Liquidation: Initiated by creditors or regulators through a court order when a company fails to meet its obligations.

3. What triggers a liquidation process?

The following scenarios can trigger liquidation:

• Inability to pay debts (insolvency).
• Resolution by shareholders or creditors.
• Court orders based on creditor petitions or regulatory requirements.
• Non-compliance with legal or financial obligations.

4. What is the role of a liquidator?

A liquidator is an authorized professional who manages the liquidation process. Their responsibilities include:

• Assessing and valuing the company’s assets.
• Selling assets to recover funds.
• Settling creditor claims based on priority.
• Distributing remaining funds to shareholders.
• Ensuring compliance with legal requirements.

5. Who gets paid first during liquidation?

The Insolvency and Bankruptcy Code (IBC) outlines the priority of payments:

1. Secured creditors with collateralized loans.
2. Workmen’s dues and employee compensation.
3. Unsecured creditors, including suppliers and contractors.
4. Government dues, such as taxes and penalties.
5. Equity shareholders, if funds remain after all debts are cleared.

6. How is the liquidation process initiated?

1. Voluntary Liquidation:
   • The board of directors proposes liquidation.
   • Approval is obtained from shareholders and creditors.
   • A liquidator is appointed.
2. Compulsory Liquidation:
   • A petition is filed in court (usually by creditors).
   • The court appoints a liquidator and oversees the process.

7. How long does the liquidation process take?

The duration varies depending on the complexity of the case, the value of assets, and the number of creditors. On average:

• Voluntary liquidation: 6-12 months.
• Compulsory liquidation: 12-24 months or more.

8. What happens to employees during liquidation?

Employees are terminated when a company enters liquidation. However:

• Outstanding wages and benefits are prioritized during asset distribution.
• Workmen’s dues are given precedence over unsecured creditors.

9. Can a company recover after entering liquidation?

No, liquidation is the final step. Once the process is complete, the company ceases to exist. However, in some cases, parts of the business or assets may be sold to another entity, preserving some value.

10. What happens to directors during liquidation?

Directors face scrutiny during the liquidation process, particularly in cases of insolvency. They must:

• Provide accurate financial records to the liquidator.
• Cooperate fully during investigations.
• Avoid fraudulent practices or wrongful trading, as these can lead to personal liability.

11. What is wrongful trading, and how does it impact directors?

Wrongful trading occurs when directors allow a company to continue operating despite knowing it cannot pay its debts. Consequences include:

• Personal liability for the company’s debts incurred during the period of wrongful trading.
• Disqualification from holding director positions in the future.

12. What is the difference between insolvency and liquidation?

• Insolvency: The financial state where a company cannot pay its debts.
• Liquidation: The legal process of closing the company by selling its assets to pay creditors.

13. How are secured and unsecured creditors treated during liquidation?

• Secured Creditors: Paid first from the proceeds of the assets pledged as collateral.
• Unsecured Creditors: Paid after secured creditors and workmen’s dues. They often receive a lower percentage of their claims.

14. What is the role of NCLT in liquidation under IBC?

The National Company Law Tribunal (NCLT) oversees insolvency and liquidation cases in India. Its roles include:

• Approving or rejecting insolvency petitions.
• Appointing resolution professionals or liquidators.
• Ensuring adherence to the IBC framework.

15. How can creditors file claims during liquidation?

Creditors must submit proof of their claims to the liquidator. This includes:

• Invoices or contracts as evidence of debts.
• Supporting documents like payment records or legal agreements. The liquidator verifies claims before approving them for payment.

16. Can shareholders recover their investment during liquidation?

Shareholders are the last to receive funds during liquidation. They will recover their investment only if:

• All secured and unsecured creditors are paid in full.
• Any surplus funds remain after settling liabilities.

Conclusion

Liquidation, while often a challenging and complex process, serves as a mechanism to address insolvency and protect stakeholder interests. For companies, directors, creditors, and shareholders, understanding the nuances of liquidation is essential to navigate its financial, legal, and operational impacts. Professional guidance can play a pivotal role in ensuring a smooth process, maximizing recoveries, and minimizing liabilities.

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We at MUDS on having a glance at chapter III derived the interpretation that liquidation process can be initiated only when the resolution plan as required to be submitted by the resolution professional is not received by the adjudicating authority or rejects the resolution plan due to non compliance of the specified requirements at any time before the expiry of maximum permitted period of corporate insolvency resolution process or fast track corporate insolvency resolution process.

The resolution professional appointed to conduct the corporate insolvency resolution process shall also act as liquidator for the corporate debtor. In order to avoid any ambiguity, the power and duties of the liquidator have been clearly stated in the chapter itself.

Initiation of Liquidation

In the situation where the adjudicating authority does not receive an approved resolution plan by the resolution professional before the expiry of insolvency resolution process period or the maximum permitted period for CIRP or fast track CIRP or the adjudicating authority rejects the received resolution plan due to non compliance of the specified requirements, then it may pass order for liquidation of corporate debtor along with issuing public announcement for the same.

The resolution professional can himself approach the adjudicating authority for seeking liquidation order against the corporate debtor on request of the committee of creditors at any time during the CIRP but before the confirmation of resolution plan.

Any person whose interest is significantly affected by the contravention of the corporate debtor can also make an application to adjudicating authority for seeking liquidation order against the concerned corporate debtor.
It is evident to note that once a liquidation order has been passed, there shall prevail a stay on all legal suits and proceedings by or against the corporate debtor.

Appointment of Liquidator

Once the order for liquidation is passed by the adjudicating authority, the resolution professional appointed for carrying out CIRP proceedings shall act as the liquidator also. Once the liquidator is appointed, the board of directors, KMP, and partners of the corporate debtor shall seize to have any control over the affairs of the business.

Replacement of Liquidator

The resolution professional who is acting as a liquidator can be replaced by an order passed by the adjudicating authority in the following cases:

1. In the cases where a resolution plan submitted by resolution is rejected due to failure to meet the specified requirements.
2. The replacement of resolution professional is recommended by the board to the adjudicating authority

The adjudicating authority would request the board to propose the name of insolvency professional who is replacing the existing liquidator. On receipt of the request from adjudicating authority, the board shall within 10 days propose the name of an insolvency professional who could replace the existing liquidator. The adjudicating authority shall thereafter appoint the proposed insolvency professional as the liquidator.

Liquidation estate

The liquidator after being appointed shall form a pool of the assets of the corporate debtor which will ultimately be used to settle the dues after liquidation to settle the claims. The pool of assets created out of the assets shall be called the liquidation estate. The liquidator shall hold this created pool in the capacity and position of a fiduciary for the benefits of the creditors. The provisions of the chapter clearly highlight the assets which shall be included and excluded in the liquidation estate.

Consolidation of Claims

After forming the liquidation estate, the liquidator shall receive and collate the claim from creditors within the duration of 30 days from the commencement of the liquidation process. Both the financial as well as the operational creditors would submit their claim to the liquidator as well as to the informational utility. Any creditor can withdraw his submitted claim within a period of 14 days, from the date of original submission of the claim.

Verification of Claims

The liquidator on receiving the claims from creditors shall verify them in the manner specified by the board. At the time of verifying the claims, the liquidator if feels that there is a requirement of additional documents from any creditor then the liquidator may ask the same from the concerned creditor.

Decision on the claim

After having verified the claims submitted by the creditors, the liquidator can either accept or reject the claim submitted in full or partly. At the time of rejecting the submitted claim, the liquidator shall give the reason for rejecting the submitted claim. After obtaining and verifying the received claims, the liquidator shall communicate his decision of accepting or rejecting the claim to the creditors and corporate debtor within 7 days of admission or rejection as is the case.

Determination of claim value

The liquidator after practicing the exhaustive decision-making exercise of admitting or rejecting the claim shall finally determine the final value of the claims admitted by it.

Appeal against the liquidator

Any creditor who feels offended by the decision of liquidator in terms of accepting or rejecting the claim submitted may appeal to the adjudicating authority with the time duration of 14 days. The time duration shall be counted from the date on which the decision of liquidator is received.

Role of secured creditors in the liquidation process

The secured creditors have a crucial role in the liquidation process. Accordingly, the secured creditor may relinquish his security interest to the liquidation estate and thereby receive the proceeds from the sale the concerned assets by the liquidator.

The secured creditor can also realize his security interest in the manner specified in the code. At the time of realizing the security interest, the concerned secured creditor shall intimate the same to the liquidator and accordingly identify the assets through which security interest shall be realized.

Distribution of assets on liquidation

Once the liquidation order is passed, the liquidation estate created shall be realized to pay off the creditors and settle the legal dues in relation to the liquidation process. The hierarchy for the distribution of assets on liquidation is as follows:

Dissolution of corporate Debtor

Once the assets of the corporate debtor have been liquidated, the liquidator shall finally make an application to adjudicating authority for the dissolution of the corporate debtor. The adjudicating authority on receipt of dissolution application order the dissolution of the corporate debtor from the very date on which it has passed the dissolution order in this regard.it shall be ensured that the dissolution order copy is filed with the concerned authority with which the corporate debtor is registered.

The above liquidation process will come into action only when the CIRP proceedings will fail to deliver the required output.

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