Liquidation Of Company

Introduction

A joint stock company is an artificial person created by law. It can be closed only through law. A company is brought to an end by closing its operations. When the company suffers continuous losses it may have two options with it. It may go for internal reconstruction or may think of winding up. When the company plans for winding up, its assets are sold, the liabilities are paid in due order and then the resultant cash if any may be distributed towards shareholders.

In this chapter the students will be learning various modes of winding up and how the payments are made towards various claimants in due order by the Liquidator.

Liquidation of company or winding up of company refers to termination of the legal existence of the company. In other words, it is the term which refers to the procedure in which the affairs of the company are brought to an end.

On liquidation the affairs of a company are wound up and its name is struck off from the Register of the Registrar of Companies and this fact is published in the Official Gazette. The word “liquidation” has been replaced by “Winding-up” resulted the term liquidation has not been used

Anywhere in the Companies Act, 2013. It is the word “winding-up” which has been used in this Act. It is worth mentioning that the process of liquidation is legally termed as “Winding-up” of companies.

Definition: As per Section 2 (94A) of the Companies Act 2013, Winding-up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.

MODES OF WINDING UP:

Types of Liquidation: The joint stock companies may be liquidated under the following three modes.

1. Compulsory winding up or Winding up of Company by a Tribunal: It is a type of winding up under which the company is asked to wind up compulsorily through the order of the court. The court may order the company to wind up if the company has failed to fulfill any of the legal obligations as per Companies Act or that such company is performing against to public interest etc. In this case the court appoints the officer called Official Liquidator to administer and report the liquidation proceedings.

As per section 271 of the Companies Act 2013, a company can be wound up by a tribunal in the following circumstances:

(a) If the company has by special resolution resolved that the company be wound up by the tribunal.

(b) If the company has acted against the interest of the integrity or morality of India, security of the state, or has spoiled any kind of friendly relations with foreigner or neighboring countries.

(c) If the company has not filed its financial statements or annual returns for preceding 5

Consecutive financial years.

(d) If the tribunal by any means finds that it is just and equitable that the company should be wound up.

(e) If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or management connected with the formation of company is found guilty of fraud, or any kind of misconduct

Section 272 provides that a winding up petition is to be filed in the prescribed form in 3 sets. The petition for compulsory winding up can be presented by the following persons:

  • The company; or
  • The creditors; or
  • Any contributory or contributories
  • By the central or state govt.
  • By the registrar of any person authorized by central govt., for that purpose

The winding up petition has to be accompanied with a Statement of Affairs. The tribunal after hearing the petition has the power to dismiss it or to make an interim order as it think appropriate or it can appoint the provisional liquidator of the company till the passing of winding up order.

2. Voluntary winding up: It is a type of winding up under which the members or creditors voluntarily take up decision to wind up without the interference of the court. Voluntary winding up are of two types:

(a) Members’ Voluntary winding up: It is a type of voluntary winding up in which the decision to wind up is taken up by members. It is possible only when the company is fully solvent. In this case the liquidator is appointed by members by themselves and he need to report to the members directly.

(b) Creditors’ Voluntary winding up: It is a type of voluntary winding up under which the decision to wind up is taken up by creditors. They can take the decision to wind up when the company is found insolvent. In this case the liquidator is appointed by the creditors themselves and he needs to report to the creditors directly.

The company can be wound up voluntarily by the mutual agreement of members of the company, if:

(a) The company passes a Special Resolution stating about the winding up of the company.

(b) The company in its general meeting passes a resolution for winding up as a result of expiry of the period of its duration as fixed by its Articles of Association or at the occurrence of any such event where the articles provide for dissolution of company.

The Procedure of Voluntary Winding up of solvent company under section 304 is now omitted from the Companies Act, 2013. Therefore, making section 59 of Insolvency and Bankruptcy Code (IBC), 2016 applicable from 1st April, 2017.

Some Key features of section 59 of Insolvency and Bankruptcy Code, 2016 are as follows:

  • Shifting of Powers from Official Liquidator to Insolvency Professional.
  • Jurisdictional Authority has been shifted from High Court to National Company Law Tribunal (NCLT).
  • Timeline for carrying out the Voluntary Winding up process under the Insolvency and Bankruptcy Code is of 12 months.
  • The shifting of Jurisdictional Authority from High Court to NCLT will result into faster execution as Insolvency Professionals have been entrusted with powers of completing the winding up process and reporting to NCLT.
  • With the passing of special resolution at the Members meeting and declaration of solvency, the company can commence with the winding up proceedings.

Under section 59 clause 1[7] of the IBC,2016 it is stated that voluntary liquidation proceedings of an organization, company, a business can only be initiated by a corporate person who has committed any default.

Steps for voluntary winding up process of Company as per Section 59 of the Insolvency and Bankruptcy Code, 2016

1. The Directors of the company make a declaration of bankruptcy in the form of an affidavit.

2. The Board of directors need to recognize a registered insolvency professional, who will act as the liquidator and conduct the voluntary wound up process.

3. Convene a meeting of the board of directors.

4. A general meeting of the shareholders has to be convened within 4 weeks of the declaration of solvency.

5. The appointed professional liquidator files the resolutions to the Registrar of companies and the Insolvency and Bankruptcy Board of India. The process of voluntary liquidation is said to be in process from the date of the filing of the resolutions subject to the approval of the creditors.

6. The appointed professional liquidator takes charge of the company and has the powers to consult any shareholder who is entitled to the distribution of proceeds.

7. The appointed liquidator is to make a public announcement within 5 days of his assignation.

8. The liquidator is to file a preliminary report under 45 days from the initiation of the liquidation. The report is to be submitted to the company.

9. A bank account is opened by the liquidator in a scheduled bank under the name of the Company with the words “in voluntary liquidation” following it, to receive all the dues and realize the assets to meet the cost of liquidation.

10. A No-objection letter is to be obtained by the liquidator from the tax authorities of the place where the registered office of the company is situated.

11. The liquidator will recuperate and understand the resources of the organization in a time-bound way maximizing the estimation of the shareholders. The assets realized will be stored in the bank account opened for this reason.

12. The cash which is realized from the profits will be dispersed to the shareholders.

13. The process of liquidation has to be completed by the appointed liquidator within 12 months from the date of initiation of the liquidation.

14. After the liquidation process is complete the liquidator has to prepare a final report to the Registrar and the Insolvency and Bankruptcy Board of India.

15. An application is made to the National Company Law Tribunal for the dissolution of the company who then pass an order after which the company is said to stand dissolved.

3. Voluntary winding up under the supervision of the court: It is a mode of winding up under which the decision to wind up is taken either by members or creditors but under the supervision of the court. When any member or creditor suspects irregularities in the voluntary winding up process, he can seek the interference of the court. The court thereupon appoints either new liquidator or may direct the existing liquidator to perform judiciously.

LIQUIDATOR:

Liquidator refers to an individual or a group of individuals (called insolvency professionals) appointed either by the court or by the members of the company for the purposed of conducting the liquidation process.

Functions/Duties of a Liquidator:

The liquidator has to perform certain during liquidation process and they are as under:

(a) The primary function of a liquidator is to realize the assets of the company.

(b) He has to collect the money due from various debtors and contributories.¹

(c) He has to distribute the amount realized in the order of preference as per rule 392 of

Companies Act. (d) He has to maintain and submit the record of receipts and payments of cash to the respective authorities who has appointed him.

Note: Contributory: According to Sec.428 of Companies Act, ‘a contributory is every person liable to contribute to the company in the event of its winding up and includes the holders of any shares which are partly paid up and also any other person alleged to be a contributory’.

ORDER OF PAYMENTS IN THE EVENT OF LIQUIDATION:

In the event of liquidation of companies, the Liquidator must pay towards various claimants in the following order.

(a) Secured Creditors

(b) Liquidation expenses (including legal expenses if any)

(c) Liquidator’s remuneration: (Calculated on assets realized, on amount paid to debenture holders, on amount paid to Preferential Creditors, on amount paid to unsecured creditors, on amount paid to preference share holders, on amount paid to Equity share holders.

(d) Debenture holders (including arrears of interest if any)

(e) Preferential creditors:

(f) Unsecured creditors

(g) Calls received in advance

(h) Preference share holders (including arrears of Pref. Dividends)

(i) Equity Share holders.             

LIQUIDATOR’S FINAL STATEMENT OF A/C

A liquidator after conducting the liquidation process has to submit a report to either the court or to the members of the company as the case may be. This report is submitted in the form of a statutory statement called ‘Liquidator’s Final Statement of A/c’ or the ‘Liquidator’s Final Statement of Receipts and Payment a/c.

A specimen or profarma of Liquidator’s Final Statement of A/c is given as under.

LIQUIDATOR’S FINAL STATEMENT OF A/C SUBMITTED AS ON…………

Points to be noted while preparing liquidator’s final statement of a/c.

(1) Take all the receipts on Dr. Side and all payments on Cr. side of a statement

(2) The words ‘To’ and ‘By’ or ‘Dr’ &’Cr” need not be used since it is a statement & not an a/c.

(3) Regarding assets realized: Take entire realized value of the secured assets, if the same is realized by liquidator. On the other hand if such assets are realized by the secured creditors themselves then take only the surplus amount (i.e. Secured asset realized creditors claim) secured

Note: If it is not clearly stated as to who has realized the secured assets, it may be assumed that it is realized by the liquidator himself. (Some authors consider that such assets are realized by secured creditors themselves, in the absence of specific information)

(4) In case of free assets (i.e., other assets which are not mortgaged) full realized amount is taken on debit side.

(5) Regarding payment towards secured creditors: The secured creditors will be paid to the extent of amount realized from the secured assets or the amount of their claim whichever is less. (In case the assets realized are lesser than the claim amount, then the balance of secured creditors should be treated as unsecured creditors. As such unpaid amount will be paid along with unsecured creditors)

(6) Regarding payment towards liquidator’s remuneration: Liquidator is entitled to receive a fixed rate of commission on the event of liquidation. This rate is fixed by the party who appoints him. It is calculated on the following items as under:

(a) On the assets realized: Here the remuneration is calculated as under:

Commission =Total assets realized¹ x Rate of Commission /100

Total assets realized¹ is calculated as under:

Free assets realized (excluding cash and Bank balance)                                                  XXX

Surplus amount of secured assets (if realized by secured creditors) (or)

Full amount of secured assets (If realized by the Liquidator)                                        XXX

Total assets realized                                                                                                                       XXX

Note: (i) Don’t include cash/bank balance in the above assets realized unless it is specifically sated in the problem.

(ii) When the problem states that remuneration to be paid on the total amount realized then, remuneration should be calculated on total receipts including surplus of secured assets, calls in arrears, call money received but except cash and bank balance

(b) On payment made to unsecured creditors including preferential creditors:

(i) If full amount of cash is available for payment then,

Commission =Total claim x Rate of Commission/100

(ii) If full amount of cash is not available for payment then,

Commission =Total cash available x Rate of Commission /100+Rate of Commission

Note: While calculating remuneration on amount paid to unsecured creditors calculate even on amount paid to preferential creditors unless it specifically stated to exclude the same

(c) On payment made to Shareholders:

Commission =Total cash available x Rate of Commission /100+Rate of Commission

Note: Here generally shareholders refer to only equity shareholders. Thus unless specifically given, remuneration should not be calculated on the amount paid to preference shareholders. Further, as equity shareholders are the end receivers, they will be paid the entire cash available after paying to all other parties.

(7) Regarding payment towards Debenture Holders: While paying debenture holders first arrears of debenture interest should be paid before paying actual debenture amount. The following provisions may be noted while ascertaining the arrears of interest on debentures and any other loans:

(a) If the company is solvent, interest must be paid till the date of repayment of loan.

(b) If the company is insolvent, interest must be paid till the date of liquidation.

Note: If sufficient amount is not available to pay to Debenture holders then consider that the company is insolvent.

(8) Regarding payment made to preferential creditors: Preferential creditors are the part of unsecured creditors who have a preferential right in claiming the amount over the other unsecured creditors. Normally the total amount of preferential creditors will be given in the problem directly. In case it is not specifically stated then the following amounts are considered as preferential creditors:

(a) All revenues, taxes, and rates whether payable to the Govt., or local authority, due and payable by the company within 12 months before the date of commencement of winding up.

(b) All wages or salaries of any employees due for a period not exceeding four months or maximum of 20,000 per employee (w.e.f. March 1997) whichever is less.

(c) All sums due to an employee from a provident fund, pension fund, gratuity fund, or any other fund maintained for the welfare of the employees.

Note: Salaries due to an officer like director, manager, secretary, assistance secretary, branch manager, etc. are not preferential creditors

(9) P&L a/c (Dr. or Cr.), General Reserve or any other accumulated reserve/funds should be ignored.

Liability of Contributories:

Contributories are the members (or) the shareholders of the company who are liable to contribute the amounts remaining unpaid on their shares to the liquidator in the event of the liquidation of the company. They are classified into 2 categories as under:

(a) ‘A’ List Contributories: These are the present members of the company (i.e., at the time of winding up of the company) who are liable to contribute the amounts remaining unpaid on the shares held by them.

(b) ‘B’ List contributories: These refers to the past members of the company who have ceased to be a member of the company within a year before the winding up of the company. These are liable to contribute the amount remaining unpaid on the shares held by them.

‘B’ List contributories have to contribute or pay to the company on the shares previously held by hem subject to the following conditions.

(1) The past member who is ceased to be member for at least 1 year before the winding up of the company is not liable to contribute (i.e., if a member has transferred the shares or ceased to be member not within a year, but previous to 1 year before the liquidation.)

(2) The amount realized from the sale of company’s assets and from calls from various ‘A’ list contributories are not sufficient to meet the liability of the company in full.

(3) They are liable to pay only those debts which existed at the time they were ceased to be members.

(4) They are not liable for any debts after they ceased to be the members.

(5) Their liability arises only if the shares transferred by them are partly paid and the transferee has failed to repay the amount due on the shares to the company.

(6) Their maximum liability is restricted to the amount remaining unpaid on the shares transferred by them.

(7) If there are two or more ‘B’ List contributors they will share the liability proportionately subject to the maximum amount due on the shares.

INSOLVENCY & BANKRUPTCY CODE, 2016

Key Objectives of the Insolvency and Bankruptcy Code, 2016

The objects clause of the Insolvency and Bankruptcy Code lays down the following key

Objectives:

1. To consolidate and amend the laws relating to reorganization and insolvency resolution of

2. Corporate persons, partnership firms and individuals

3. To provide for a time bound insolvency resolution mechanism

4. To ensure maximization of value of assets,

5. To promote entrepreneurship,

6. To increase availability of credit

Introduction:

Insolvency and Bankruptcy Code, 2016 (IBC) provides a time-bound process for resolving

Insolvency in companies, partnership firms and among individuals throughout India.

The words “Insolvency” and “Bankruptcy” are generally used interchangeably in common parlance but there is a clear distinction between the two. Insolvency and bankruptcy are not same.

The term “insolvency” denotes the state of one whose assets are insufficient to pay his debts; or his general inability to pay his debts. The term “insolvency” is used in a restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business.

The word “bankruptcy” denotes a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated and used to pay the creditors in accordance with law.

Therefore, while insolvency is the inability of debtors to repay their debts, the bankruptcy, on the other hand, is a formal declaration of insolvency in accordance with law of the land. Insolvency describes a situation where the debtor is unable to meet his/her obligations and bankruptcy occurs when a court determines insolvency, and gives legal orders for it to be resolved. Thus, insolvency is a state and bankruptcy is the conclusion. The term insolvency is used for individuals as well as companies. If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of companies.

What is Insolvency and Bankruptcy Code?

  • The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
  • This was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons.
  • IBC resolve claims involving insolvent companies. This was intended to tackle the bad loan problems that were affecting the banking system. Two years on the IBC has succeeded in a large measure in preventing companies from defaulting on their loans. The IBC process has changed the debtor-creditor relationship. A number of major cases have been resolved in two years, while some others are in advanced stages of resolution.

Key Objectives of the Insolvency and Bankruptcy Code, 2016

The objects clause of the Insolvency and Bankruptcy Code lays down the following key

Objectives:

1. To consolidate and amend all existing insolvency laws in India

2. To provide for a time bound insolvency resolution mechanism

3. To ensure maximization of value of assets.

4. To protect the interest of creditors including stakeholders in a company

5. To promote entrepreneurship.

6. To increase availability of credit

7. To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and

8. To establish an Insolvency and Bankruptcy Board of India as a regulatory body

9. To get the necessary relief to the creditors and consequently increase the credit supply in the economy.

10. To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals

Salient features of the Insolvency and Bankruptcy Code, 2016

(a) Covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.

(b) Adjudicating authority: National Company Law Tribunal (NCLT) for companies and LLPS

(c) Debt Recovery Tribunal (DRT) for individuals and partnership firms

(d) Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.

(e) Insolvency professionals handle the commercial aspects of insolvency resolution process.

(f) Insolvency professional agencies develop professional standards, code of ethics and be first level regulator for insolvency professional’s members leading to development of a competitive industry for such professionals.

(g) Information utilities collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.

(h) Enabling provisions to deal with cross border insolvency.

Applicability of code

  • Applies to whole of India including J&K and Ladakh.
  • Persons covered:
  • Company
  • Limit Liability Partnership
  • An individual
  • A Hindu Undivided Family
  • A Partnership
  • A Trust
  • Any other entity established under a statute, and includes a person resident outside the India.

Who can approach?

Any person whose amount is due with the Company or LLP (minimum amount 1,00,00,000) can approach to NCLT (National Company Law Tribunal) under IBC (Insolvency and Bankruptcy Code) 2016 for Liquidation of that Company/ LLP.

Examples are written as following:

1. Financial/Operational Creditors

2. Corporate Debtor

3. Corporate Applicant

4. An Employee: A person who was / is working in a Company / LLP may file a petition if his dues are 1,00,00,000 or more.

5. Service Provider: Any service provider who has given the services and raised the Invoice but unable to recover the dues may file a petition if his dues are 1,00,00,000 or more. (After central govt. notification dated 24.03.2020)

6. Goods Provider: Any Goods Provider who has delivered the goods and raised the Invoice but unable to recover the dues may file a petition if his dues are 1,00,00,000 or more. (After central govt. notification dated 24.03.2020)

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