The terms winding up or the Company Liquidation Process are often given a negative connotation in the business world. This makes sense because liquidation, more often than not, occurs due to a decline in business. Even by definition, liquidation refers to the process through which a business is brought to an end. When a business undertakes the liquidation exercise, a liquidator is assigned to take possession of its assets, conclude its operations, execute proof of debt, settle credit, and assign the surplus funds to multiple stakeholders. If the company's assets fall short to cover the liabilities, the liquidator will dispose of any other assets (perhaps personal) and utilize the recoveries for paying the creditors.
With the onset of the pandemic and its widespread effects, it is believed that liquidation will become increasingly common in the near future. However, contrary to popular belief, the company liquidation process can, in fact, help businesses to preserve value. Here we bust a few myths about the company liquidation process and talk about some ways in which it can be beneficial for your business.
While the company liquidation process is usually perceived to be an option that a business considers when it gets insolvent, through a process called 'solvent liquidation', even a solvent company can wound up voluntarily. These companies need to obtain approval from 75 per cent of their shareholders in order to do this. This process is a valuable tool that can help solvent companies to protect their value and avoid further losses.
In such a scenario, the responsibility lies on the leadership of the business to act wisely & timely and initiate the MVL processes. Any delays in initiating this process would mean that the loss-making company would continue its operations, accumulating more liabilities and ultimately further reducing its value. Moreover, as the value of the business decreases, it gives more power to creditors, making it difficult for the management to control the decision-making process. Additionally, in the event of ultimate company insolvency, the company will not be able to undertake an MVL as in the case of an insolvent liquidation; the recoveries are completely utilized to cover the credits.
In desperate times, the line between right and wrong can easily get blurred and this could result in the infringement of financial duties at the hands of company leadership. These infringements may include activities like undervalued disposal of property, private transactions, preference payments, or even dissipation of business assets for personal profits.
In such situations, creditors, shareholders, and other stakeholders step up to absorb a more proactive role to improve the situation. One possible option is to hire a liquidator to displace the leadership. In this case, once the winding-up orders are issued, the directors will be released from their position, and the liquidator will take full control over the company. If there's a real chance of degeneracy, an interim liquidator can be hired to safeguard the business assets ahead of the winding-up order.
Generally, during voluntary liquidation, the liquidator has immense power. These powers range from taking possession of all assets to investigating business affairs. The liquidators are also required to legally handle the perpetrators and bring back the assets that have been illegally brought out from the company.
Abandoned projects (mostly housing and real estate) are a result of cost overruns and poor sales. When a project is abandoned, buyers are still required to clear their loans even if they're no longer getting the property that they purchased.
The Company Liquidation Process could help to restore such abandoned projects. In such cases, a liquidator usually conducts a feasibility study to understand whether the project can be restored. These practices are incredibly complicated and involve multiple stakeholders at different steps of the process.
It is important to conduct a voluntary liquidation process on time since the longer a project remains abandoned, the higher the restoration costs will be. This could be because of the damaging of structures, vandalism and other such issues. The concerned authorities should therefore act proactively to seek the necessary legal help and appoint a liquidator to control the project sites.
These factors prove that it's a good idea to opt for voluntary liquidation in necessary circumstances to retain the value of your business. Let's try and understand the step by step procedure for the company liquidation process in India.
The board of directors needs to make a declaration of solvency in the form of an Affidavit stating the following-
The board needs to identify and appoint an insolvency professional to act as a liquidator. This individual needs to be registered with the Insolvency and Bankruptcy Board of India and should have a clear idea of the processes of voluntary liquidation under IBC.
The board needs to convene a meeting with the shareholders within four weeks of declaring solvency. The following resolutions need to be passed in the meeting.
We at TRC Corporate Consulting have a panel of over 15 IBBI registered company insolvency professionals operating across the country. We provide in-house expertise and help you take care of all the significant tasks in the liquidation process of your company. From Compliance to Transactions and Supervision, our experts will ensure a smooth and convenient liquidation process for your company.
TRC also assists resolution professionals by offering a range of ancillary services like FAR management, 29-A verification, evaluation of resolution plans, and process advisory. Check out our website to know more about our offerings.
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