Last updated: March 8th, 2023 5:20 PM

What Is Liquidation?

Liquidation is the process of winding up a business voluntarily or through a court order. In India, liquidation of a company involves selling off the assets of the company and distributing the proceeds among its creditors and shareholders. The Companies Act of 2013 regulates the liquidation process. When a company is liquidated, the shareholders’ interest in the company is extinguished, and the company ceases to exist. The company’s assets are sold off to repay its debts and to distribute the remaining funds among its shareholders.

Reasons for Liquidating a Company

1. Insufficient funds: A company may run out of money due to mismanagement, overspending, or excessive borrowing. As a result, the company may be unable to pay its debts or continue its operations. In such cases, liquidation is the only option.
2. Lack of business activity: If a company fails to generate sufficient revenue to cover its costs, it may have to close its doors. This could be due to changes in the market or increased competition.
3. Fraud or mismanagement: If the owners or managers of a company are found to be stealing or misusing funds, liquidation may be the only option. This could be due to criminal activities such as embezzlement or fraud.
4. Changes in the law: A company may go into liquidation if it cannot adapt to changes in the law. This could be due to changes in tax rates, environmental regulations, or labour laws.
5. High debt levels: If a company has a large amount of debt, it may be forced to liquidate in order to pay off its creditors.
6. Mergers and acquisitions: When two companies decide to merge, or one company acquires another, liquidation may be necessary to streamline the process.

Process of Liquidation

• Obtain Approval of Members: The company must obtain consent of the members through a special resolution in the general meeting of the company to liquidate it.
• File Notice of Intention to Liquidate: The company must file a notice with the Registrar of Companies (ROC) informing the ROC of the intention to liquidate the company along with the details of the meeting in which the resolution was passed.
• Appoint Liquidator: The company must appoint a liquidator who is a Chartered Accountant or a Company Secretary in practice to carry out the liquidation process.
• File Statement of Affairs: The company must file a statement of affairs with the ROC containing the details of the assets and liabilities of the company.
• Prepare Liquidation Account: The liquidator must prepare a liquidation account in the prescribed format to determine the amount that is to be distributed to the shareholders.
• Distribute Assets: The liquidator must distribute the assets of the company in accordance with the provisions of the Companies Act, 2013.
• File Final Report: The liquidator must file a final report with the ROC containing the details of the winding up process and the distribution of assets.
• Obtain No Objection Certificate from ROC: The company must obtain a no objection certificate from the ROC and file the same with the ROC to complete the liquidation process.

The liquidation process in India is complex and time-consuming. Depending on how complicated the case is, it can take months or even years to finish. In conclusion, there are several reasons for liquidation in India. According to the 2013 Companies Act, the process must be carried out by the liquidator. The liquidation process can be lengthy and expensive, and it is important to ensure that the company’s creditors and shareholders are treated fairly throughout the process.