Liquidation Process of Companies in India

Process Of Liquidation of a Company in India

Due to various reasons, many companies across the world wind up their business, at the time of closure they need to follow certain rules and regulations defined by the government, one of the important processes that they need to go through while closing a company is Liquidation of the company.

What is Liquidation?

When a company becomes insolvent, the process of shutting it down and distributing its assets to claimants is known as liquidation. This process is followed in most countries as well as in India.

Who can apply for a voluntary liquidation?

A company that wishes to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings in accordance with the prescribed provisions [Section 59(1)].

 

The Pre-liquidation Process:

1. Declaration of Solvency:

A declaration must be submitted from the majority of the company's directors, which must be supported by an affidavit, indicating the followings:

  1. They have conducted a thorough investigation into the company's operations and have concluded that the company either has no debt or will be able to pay its debts in full.
  2. The company is not being liquidated in order to defraud anyone.
  3. In addition, the declaration must be accompanied by the following documents:
    1. Audited financial statements and a record of the company's business operations for the past two years, or for the period since its incorporation, whichever is later.
    2. A report made by a registered valuer on the valuation of the company's assets, if any.

 

2.  Approval of the Members:

Within four weeks of declaring solvency, the members of the company must pass a special resolution in a general meeting requiring the company to be liquidated voluntarily and appoint an insolvency expert to act as liquidator.

3. Approval of the Creditors:

If the company owes any person any debts, the creditors representing two-thirds of the company's debt must approve the resolution passed for voluntary liquidation within seven days of such resolution.

 

4. Intimation to the ROC and IBBI:

The company must notify the ROC and the IBBI within 7 days after the resolution to liquidate the company or the subsequent approval by the creditors, whichever is earlier.

The commencement date for Voluntary Liquidation:

Subject to the approval of the creditors, the voluntary liquidation procedures in respect of a company are assumed to have begun on the date of the special resolution's passing.

 

The Process of Voluntary Liquidation:

1. Public Announcement:

Within 5 working days of his appointment, the Liquidator must publish a public notification requiring claimants to submit their claims within 30 days. It must be published in one English daily and one regional daily newspaper in the city where the company's registered office is located. It must also be published on the corporate website.

The following information must be included in the Public Announcement:

  • Liquidation commencement date.
  • Name, Contact number, Address, Registration number of liquidator
  • Mode of submission of claim
  • Last date of submission of claim

2. Opening of Bank Account:

For receiving and paying the settlement money, a new bank account with a scheduled bank must be opened with the words 'In Liquidation' at the end after the name of the company. Every financial transaction must be settled through one of these accounts.

Collection of Claims, Segregation of Claims, Acceptance and Rejection of Claims: A claim entails:

  • A payment right, whether or not it is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
  • A right to a remedy for breach of contract under any applicable law, whether or not such breach gives rise to a claim to payment, whether or not such right is converted to judgement, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
  1. Claim by Operational Creditors: An Operational Creditor who is not a workman or employee must present proof of claim to the liquidator in person, by mail, or email in Form B of Schedule 1 of the Voluntary Liquidation Process Regulation.
  2. Claim by Financial Creditors: A person claiming to be a financial creditor of the company must provide proof of claim to the liquidator in Form C of Schedule I via electronic means.
  3. Claim by Workmen and Employees: A person claiming to be a workman or an employee of the company must submit proof of claim to the liquidator in Form D of Schedule I in person, by mail, or by email. Where the company owes money to a number of workers or employees, an authorised representative may file a single proof of claim in Form E of Schedule I on their behalf.
  4. Claim by Other Stakeholders: A person claiming to be a stakeholder other than those listed above must submit proof of claim to the liquidator in Form F of Schedule I in person, by mail, or email.

Voluntary Liquidation Process Mechanism:

1. Conducting a Board Meeting:

This procedure is a necessary part of establishing the following:

  • To authorize the Voluntary Dissolution
  • To give approval to the Declaration of Solvency, which will be filed with the ROC and IBBI.
  • Subject to Shareholder authorization, appoint an Insolvency Professional to operate as a Liquidator and a registered valuer.
  • To approve the notice convening the General Meeting to discuss voluntary winding up, the appointment of a liquidator, and the appointment of a registered valuer.

2. Filing of the Solvency Declaration:

Another requirement prior to the voluntary winding-up procedure is the filing of the 'Declaration of Solvency' with the ROC in form e-GNL-2 and further verification by an Affidavit signed by the majority of Directors together with the accompanying attachments. The following attachments will be included:

  • Audited financial statements for the last two years.
  • The registered valuer's valuation report, if any

3. Notification of the EGM to all Shareholders:

All the shareholders of the company must be notified with prior notice of a minimum of 7 days to convene the EGM.

4. Conducting an EGM within four weeks of filing a Declaration of Solvency:

This is done in order to establish the following aspects of the voluntary winding up:

  • To authorise the stated voluntary winding up.
  • To appoint and pay an Insolvency Professional to act as a liquidator and registered valuer.

5. Creditors’ NOC:

An approval from the creditors representing 2/3rd of the debt's worth is necessary, either through a meeting or through a NOC from each of the creditors.

6. Public Announcement:

A public notice must be issued within 5 working days of the Insolvency Professional's appointment.

7. Notice to IBBI and ROC:

Intimation must be sent to IBBI and ROC within 7 days of the public announcement.

8. Opening a Bank Account for 'In Liquidation':

To receive and pay any settlement payment, a new bank account with the term 'ABC Private Limited-In Liquidation' must be opened with a scheduled bank.

9. Claims Collection and Verification:

All claims must be lodged within 30 days of the announcement's public release. The liquidator must confirm the accuracy of each claim and compile a list of stakeholders.

10. Preliminary Report Preparation:

Based on the claims received, the liquidator must provide a preliminary report comprising the capital structure, assets and liabilities, claims received, and so on within 45 days of the liquidation's start date.

11. Proceedings Distribution:

The liquidator must sell all assets at auction or through a direct party in order to recover the money from the creditors and distribute the proceeds to all stakeholders.

12. Submission of the Final Report:

The liquidator must prepare and submit a final report detailing the liquidation processes to the ROC, IBBI, and NCLT. The NCLT shall issue an order for the corporate entity's dissolution based on this final report and application for dissolution.

13. Filing an order with the ROC:

For the dissolution of the company, a copy of the order received from the NCLT must be filled out with ROC in e-form INC-28.

Conclusion:

a liquidation process is put into place to ensure that the business is able to pay off all of its debts and cover any outstanding expenses. This process will also help to pay off any debts left over after the sale of assets and liquidation of the company. The liquidation process must be done according to the company’s constitution and the laws of the state where it was registered.

If you need any help with the process of liquidation or closing a company in India, feel free to reach out to us at info@bbnc.in.

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