Liquidation of a Company: Definition, Process and Benefits

Liquidation of a Company: Definition, Process and Benefits

April 26, 2022 Admin
liquidation of company liquidation liquidation process

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.

Liquidation of a Company: Definition, Process and Benefits

What is the liquidation of a company?

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:


  • If the resolution plan is not received within the given time
  • If the Adjudicating Authority (NCLT) simply rejects the resolution plan submitted due to multiple reasons.
  • If the Committee of Creditors (CoC) approves the corporate debtor to liquidate.
  • If the approved resolution plan is contradicted by the corporate debtor.

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. 

Process of liquidation

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. 


Types of Liquidation

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:


  • Voluntary liquidation: A liquidation that is not forced by the insolvency and this type of liquidation is solely decided voluntarily by the owner(s) or member(s) of the company. This clearly indicates that the company can be considered solvent and is in a position to make payments for the creditors.
  • Creditors’ voluntary liquidation: This type of liquidation is processed when the directors/shareholders of the company realize that it is going to default on creditor payments, and no involvement court is there in this case.
  • Compulsory liquidation: This is a clear order from the court of law or adjudicating authority that the business is declared to terminate its operations and the company closes down due to the inability to repay its liabilities.


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.

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