Company Liquidation Process and Procedure

  • Blog|Insolvency and Bankruptcy Code|
  • 3 Min Read
  • By Taxmann
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  • Last Updated on 25 June, 2021

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What is Liquidation?
 
Liquidation is a process through which a company which is running is shut down and its existence comes to an end. This often happens when the companies are unable to pay its creditors and hence need to sell off its assets to pay of them. Though in another version this could be a voluntary act as well where law ensures that all the debts of a company into existence is paid before it is closed or shut down.
 
Liquidation process can be initiated under following circumstances as of section 33 of the insolvency and bankruptcy code 2016–
 
  • When no resolution plan is submitted by interim resolution professional as received from adjudicating authority on or before the expiry of insolvency resolution period.
 
  • When the resolution plan as received by interim resolution professional is non-compliant to section 31.
 
  • When a request is received from committee of creditors to liquidate the corporate debtor during the corporate insolvency resolution period and same is communicated by the interim resolution professional to the adjudicating authority.
 
  • When the corporate debtor disobeys the resolution plan which is approved by adjudicating authority and the person or creditor who is getting affected by this files an application to adjudicating authority for liquidation of corporate debtor and the adjudicating authority finds the corporate debtor guilty.

Priority List of Creditors:

The company’s filing for liquidation falls under two categories, solvent and insolvent. An insolvent company is at a shortfall of cash even after liquidation of company assets to pay off its creditors, in such a scenario, there could be conflict of interest amongst the creditors because of insufficient assets to pay all the creditors in full. Hence the law attempts to maintain the equality amongst the creditors and follow a transparent process to liquidate the assets of the company to be distributed equally amongst the creditors as per the size of their claim. Below is the priority list as per which the assets after liquidation are distributed. (Section 53)

Insolvency Resolution Process Costs and Liquidation Cost:

  • Workmen’s dues and debts due to secured creditor who has relinquished security interest.
  • Wages and dues of employees other than workmen.
  • Financial debts owed to unsecured creditors.
  • Dues to the Government and dues owed to a secured creditor who has realized security interest but the proceeds are insufficient to meet the debts
  • Residuary debts and dues
  • Preference shareholders
  • Equity Shareholders or partners

Process followed for liquidation: 

Once the liquidation process is initiated as per the above-mentioned criteria’s, then the moratorium shall commence. Following the moratorium, a public announcement shall be made about the corporate debtor being liquidated. A liquidator is appointed as per section 34 and the fee to be paid to him for the proceedings is decided. The fee for liquidator is part of proceeds from liquidation estate. The resolution professional also acts as a liquidator unless he is replaced by NCLT. Liquidation trust is formed as per section 36 of insolvency and bankruptcy Code. This section is core of company liquidation process as it defines what assets of corporate debtor shall form part of the liquidation estate, how the assets will be distributed by liquidator, and who shall hold the estate as fiduciary for the benefit of all the creditors. Then the claims from the creditors are processed. There are various sections which help in this process. Section 38 defines how to consolidate the claims from financial and operational creditors, section 39 defines how to verify claims, section 40 defines the process of acceptance and rejection of claims and section 42 defines how the applications against the liquidator decision shall be processed.

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Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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