Liquidation Of Company -
The Process Of Winding Up

Meaning Or Concept Of Liquidation:

Liquidation is the process of winding up a company by selling its assets to pay off debts. Surplus, if any is finally distributed among the members. Liquidation or Winding up of a company is the final stage in its life.

The assets of the company are sold or disposed, the assets of the company are realized out which the debts are paid (if required the members contribute for paying off the dues), and the surplus, if any, is finally distributed among the members in the ratio of their holdings in the company.

The two terms 'winding up' and 'liquidation'; are used interchangeably. In the opinion of Prof. Gower, "Winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members."

An administrator, called liquidator, is appointed and he takes control of the company; collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

The Procedure For Liquidation:

First, a liquidator is appointed, either by the shareholders or by the court. The liquidator represents the interests of all creditors. The job of the liquidator is to supervise the liquidation process. The assets of the company are sold or disposed, the assets of the company are realized out which the debts are paid (if required the members contribute for paying off the dues), and the surplus, if any, is finally distributed among the members in the ratio of their holdings in the company. After these steps have been carried out, the company is said to be formally dissolved.

Types Of Liquidation:

The law classifies liquidations into two types:

  1. Voluntary (which is by a shareholders' resolution) and
  2. Compulsory (by a court order).
  3. Liquidations are also classified according to solvency of the company.
Creditors' Voluntary Winding Up:

If a company becomes insolvent and is unable to pay its debts, conflict may arise among the creditors as there will be insufficient assets for all creditors to be paid in full.

The law tries to maintain justice between the creditors and the assets are distributed proportionately according to the size of each creditor's claim. However, priority is given to secured creditors (those with a charge over some of the company's property as security for the debt).

Members' Voluntary Winding Up:

Voluntary liquidation is the process by which the shareholders appoint a liquidator, who is supervises and becomes accountable to the creditors or shareholders. It is not obligatory to make any application to the court for this; however, the liquidator may apply to the court for directions and the court has power to remove a liquidator.

A voluntary liquidation may also by commenced by the board of directors on the occurrence of an event specified in the company's constitution.

Voluntary liquidation may be in one of two forms, depending on the solvency of the company. If the company is solvent the shareholders can supervise the liquidation. However, if the company is insolvent, the creditors may take control of the liquidation process by applying to the court. The court will require proof of solvency or insolvency to determine this matter.

Compulsory Liquidation (By Court Order):

The process of compulsory liquidation starts with an application to the court alleging that one or more of the required grounds exist. The application may be brought forward by the company or majority of its Directors, or by the Registrar of Companies, or by a Creditor. However, applications by creditors are by far the most important and common.

There are a number of factors that the court will take into account when deciding whether or not to make a compulsory liquidation order. The court has discretion as to whether or not to make the order.

Consequences Of Liquidating A Company:

The main consequences of the company being liquidated are as follows:

  1. The company ceases its power to dispose of its property.
  2. The powers of the company directors come to an end when a liquidator is appointed.
  3. The company may carry on business only for the purpose of completing the liquidation process.
  4. A liquidation order serves as a notice for dismissal of all of the company's employees. However, if an employee is on a fixed-term contract and under this contract, he/she is required to be given a period of notice, then a liquidation order will breach this contract and the employee will be entitled to damages.
  5. In case of liquidation by court order, the court has the discretion to stay or restrain any proceedings against the company as it finds fit. When a liquidator is appointed, no person can begin or continue legal proceedings against the company or in relation to its property, unless the liquidator agrees or the court permits it.
Distribution Of Company's Assets In Case Of Liquidation:

There prevails a hierarchy that determines the order in which a company's assets must be distributed in case of liquidation. This is strictly enforced by the Courts.

Any secured creditors have the first right to the assets of the company and are usually paid out before distribution. After paying off the secured creditors, remaining debts (if any) are paid in the following order:

  1. The costs, charges and expenses involved in the liquidation
  2. All wages and salaries payable to employees, including holiday pay unsecured creditors
  3. Interest (if any) attached to any debt (but only if the debt became due before the liquidation process began)
  4. Any debt owed to shareholders of the company, such as dividends or profits