Liquidation of a company is a complex process that involves understanding of multiple aspects. Only after detailed analysis of various reasons does the process start to work. Let’s find out more about it.
When a debt-laden company is not in the position to work any longer that is the time this process of liquidation is initiated. The purpose is to wind up the company’s operations and sell its assets so that all the liabilities can be paid off and if any other obligations are there, they are taken care of as well. The confirmation of liquidation is determined by the ascertainment of the fact that the company is no longer in a position to make profits.
However, the cause of the liquidation of a company can be different, but in most of the cases the reason is insolvency, that is the unwillingness or inability to carry on with the operations in a profitable manner, etc.
In case the enterprise is bankrupt, the liquidator simply sells off the company’s assets to repay liabilities once the liabilities are paid off, the positive balance is then distributed among the company’s shareholders.
To start the process of liquidation of a company, it needs to qualify for certain conditions and only then gets approved by the Adjudicating authority. Therefore, the liquidation order is sanctioned by the Adjudicating Authority (AA) in the following cases:
Once the adjudicating authority approves the liquidation order to process further, the appointed resolution professional for the particular corporate insolvency process can fulfill the role of a liquidator. Please note that the appointed resolution professional can be anytime replaced by the Adjudicating Authority under the IBC (Insolvency & Bankruptcy Code). Basically, the liquidator should be eligible as per the IB code, and he/she is supposed to fill in the position till the liquidation process is complete.
The process of liquidation of a company starts with the selling off of all assets one by one. Based on the priority, and necessity as per the understanding, the decisions are made, this excludes the cash and bank balances.
The remaining amount is then distributed among the distributors after repaying the liabilities. However, this repayment is processed in a pre-established order. The priority is given to the company’s secured creditors and the remaining amount is then used to discharge preferential creditors, this includes government taxes, employee salaries, etc.
After the completion of above debts, the remaining amount is then used to pay off the debenture-holders and any other miscellaneous liabilities are secured by a floating charge on all assets. The next task is to pay off the unsecured creditors and preference shareholders.
The final step is to find out if the funds are in surplus after all the payments to the above mentioned creditors. In case they are in surplus, the funds are then distributed among shareholders. Meanwhile, if it's the case of deficit, the shareholders are asked to pay up the share of capital that is unpaid.
Liquidation process is a tedious one, and requires crucial steps to process. But based on the conditioning and multiple other factors, the following are the three types of liquidation that you must know about:
From the above factors and understanding of the liquidation process, the conditions, scenarios and complexity explains the challenges during the process of liquidation with a purpose of winding up a company’s operations. Once the liquidation process is successfully done, the specific company will cease to exist as per the law.