Liquidation is a process by which the legal position of a company ends. Companies are closed for various reasons but one of the main reasons is that companies fail to keep their promise to repay loans from creditors, working debtors, and other creditors. The previous liquidation procedure was done in terms of the provisions of the Companies Act, 2013. The main drawback of this arrangement is that long-term liquidation and proper pardon were not granted to the company’s creditors. Therefore to reduce the lengthy process of liquidation and provide justice to creditors, the Insolvency and Bankruptcy Code, 2016(hereinafter, referred to as IBC, 2016)
What is Liquidation?
Liquidation occurs when a company is declared bankrupt, which means it is unable to repay its debts on time, and its assets are auctioned to satisfy creditors, shareholders, and claims, thereby dissolving the company. Liquidation can apply to both small businesses and huge, publicly traded companies. It can be used to depart a business that is bankrupt and no longer lucrative, while solvent businesses may also be liquidated.Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. General partners are subject to liquidation.
The term liquidation may also be used to refer to the selling of poor-performing goods at a price lower than the cost to the business or at a price lower than the business desires.
Forms of Liquidation
There are several forms of liquidation used for a number of objectives. The three most prevalent kinds of liquidation are compulsory liquidation, members’ voluntary liquidation, and creditors’ voluntary liquidation.
- Compulsory Liquidation: Compulsory liquidation happens when creditors or lenders seek to liquidate a firm if their debts are not paid within a short period of time, forcing the business to sell off its assets to repay its creditors. If you have an insolvent firm, which means it cannot pay its debts, you may be compelled to liquidate if you have not paid your payments on time.
- Members’ voluntary liquidation: In some instances, a solvent company whose owner wishes to quit may volunteer to dissolve the company. During this procedure, 75% of the company’s members must vote to liquidate it, after which a liquidator is appointed to resolve the company’s debts and legal challenges. Any remaining money are allocated to the company’s shareholders and members.
- Creditors’ Voluntary Liquidation: Creditors’ voluntary liquidation happens when a company’s directors understand that they will be unable to pay their obligations on time, or that their liabilities now outweigh the asset value. The company directors select a liquidator to settle their firm’s legal problems or debts, and the directors are then required to participate with the liquidation process in order to repay their obligations.
Liquidation Process
Liquidation may commence under Section 33 of the Code where the Adjudicating Authority (“AA”) does not receive a Plan Decision under Section 30 (6) of the Code or a maximum period determined by the business failure resolution process or when the AA expires, rejected the settlement plan under Section 31 of the Code. In addition, the Creditors’ Committee, with at least 66% of the vote, may decide to terminate the Corporate Debtor (“CD”) under Section 33 (2), at any time before the decision is approved and the Decision. The expert tells the AA of such a decision. Also, if a CD violates any of the terms of an authorized resolution, any person who has a vested interest in that infringement may apply for the liquidation of the CD.
The AA when issuing a CD Liquidation Order, will direct the issuance of a public notice under Section 33 (1) of the Code that the CD is closed and requires that the order be sent to the registered CD executives, such as the Registrar of Companies if there are companies.
Liquidation order
In the absence of any application for resolution between the time frame for the completion of the business dispute resolution process and the business dispute resolution process under Sections 12 and 56 respectively, the judicial officer shall issue an order for the liquidation of the business debt. Also, if the judicial officer finds that the application for resolution does not comply with the conditions set out in Section 31 of the Payment and Deduction Code, 2016, we will issue an order for the liquidation of the business debt. Or, if the judicial officer after receipt of the application requests a liquidation order on any person other than the business debtor, his or her interests being discriminated against in the business debtor’s breach, he or she is satisfied that there has been a breach of the business debtor’s application.
Liquidation Procedure
Step 1 – Appointment of Liquidator
Section 34 of the IBC, 2016 deals with the appointment of a liquidator. The Resolution Professional appointed for the resolution process will act as a liquidator in the shortfall system until a specific order is issued in this regard. All powers of the board, directors, creditors and corporate debtors will be given a deadline for the appointment of a judicial officer. All creditors will provide assistance and cooperation to the liquidator to manage the business debtor’s affairs.
Step 2- Public announcement of liquidation and submission of claims and appointment of the valuer.
After the order is issued, a public notice must be made within 5 days after the first day and it is requested that claims be submitted under IBBI Schedule II.
The liquidator will receive or collect the claims of the creditors within 30 days from the date of commencement of the liquidation process in terms of Section 38 (1) of IBC, 2016.
Appointment of registered valuers to estimate assets to be appointed within 7 days from the beginning of liquidation.
Step 3-
(a) Verification and approval of claims-
Section 39, 40 of IBC, 2016 deals with the verification and acceptance of claims, the liquidator will verify the claims in terms of Section 38 and may require any document or paper from creditors and debtors. According to Section 38, the liquidator will receive or collect claims within 30 days from the first day of the liquidation process. In terms of Section 39, the liquidator will verify the claims submitted within 30 days from the beginning of the liquidation process. The liquidator may, after confirmation of the claim, approve or reject the claim, in whole or in part, under Section 40.
The liquidator must acknowledge receipt of claims within 7 days from the last day for receipt/rejection of claims.
In addition, for more than 30 days the liquidator does not have the power to agree to the same. An appeal must be lodged within 14 days of such a decision of the liquidator in terms of Section 42 of the IBC, 2016. Section 42 deals with the appeal of the decision against the liquidator’s decision. The creditor may appeal to the Adjudicating Authority against the liquidator’s decision, accepting or rejecting the claims.
In terms of Section 41, the liquidator shall determine the number of claims received under section 40 in a manner not specified by the Board.
(b) Preparing asset memorandum and other reports-
The liquidator must prepare and submit the Preliminary Report, the Annual Report, the Minimum Consultation Minutes, and the Final Report.
A memorandum of assets shall be made and delivered within 75 days from the date of liquidation and shall contain the valuation of the assets under the valuation reports and sales reports when made.
Similarly, preliminary reports must be submitted within 75 days from the first date of expiration of the financial statements and estimates of assets and liabilities according to the books of account. Preliminary progress reports and subsequent progress reports provide an updated list of participants, details of properties to be sold, distribution to participants, details of fees and salaries, details of cases, and costs of cases. Upon completion of the liquidation process, the liquidator will prepare a Final Report compiling the audited account of the accounts, showing receipts and payments relating to liquidation from the commencement date, a sales statement about the asset, mode, and method of sale of assets, the liquidator will send a report to the Registrar, Board, and Judicial Authority.
Step 4- Formation of liquidation asset
The next step is to build the liquidation assets for the corporate debtor. This includes all properties in which the business debt is patentable, tangible and immovable property, intangible assets, securities in which interest is issued by a secured lender, and assets whose ownership is determined by a court or an authority.
FAQs
Can a company be revived after liquidation?
Once a company is liquidated, it ceases to exist. However, in some cases, a similar business can be started, or assets can be purchased from the liquidation process to continue operations in a new entity.
What is the impact of liquidation on shareholders?
Shareholders may receive a portion of the remaining assets after creditors have been paid, but if the company is insolvent, they may not receive anything. In a solvent liquidation, shareholders typically receive their share of the company’s value.
How long does the liquidation process take?
The duration of the liquidation process varies depending on the complexity of the company’s affairs, the amount of assets and liabilities involved, and any legal or regulatory requirements. It can take several months to complete.
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