A company’s liquidation is also known as its winding up. Depending on whether it is solvent or insolvent, the procedure varies. In a business liquidation, a company’s assets are used to settle its debts, and any remaining funds are distributed to the shareholders. There are different reasons for dissolving a company; nevertheless, the Company must duly follow the dissolution process.
The legal process of winding up allows a corporation to dissolve and stop all ongoing operations. After the Company winds up, its existence ends, and the assets are watched to ensure that the stakeholders’ interests are not compromised.
When a business or organisation dissolves, it is officially winding up. When a company is wound up, its operations come to a halt. The Company’s principal goals are to pay off its debts, sell stock to stockholders, and distribute the leftover assets to investors or business partners.
Ways of Winding Up
There are two ways to dissolve an organization:
- Compulsory winding up (By the court)
- Voluntary winding up (by the corporation willingly)
Voluntary winding up of a company
Members’ voluntary winding up and creditors’ voluntary winding up are examples of voluntary winding up. No matter which, a voluntary winding up is started by the corporation taking action to adopt a special resolution to that effect, and the winding up starts upon the resolution’s approval.
Procedure for voluntary winding up
Step 1: Properly confirmed Solvency Declaration by Majority of Directors’ Affidavit
Step 2: Board meeting
Step 3: Shareholder/Member General Meeting
Step 4: Notify the ROC
Step 5: Notify the Indian Insolvency and Bankruptcy Board (IBBI)
Step 6: Liquidator’s Public Announcement
Step 7: Open a bank account in the Company’s name for liquidation.
Step 8: Notification and approval from the Income Tax Department
Step 9: Reporting by the Liquidator
Step 10: Liquidator’s collection of claims
Step 11: The liquidator verifies the claims and compiles a list of the stakeholders.
Step 12: Realize the Company’s Assets
Step 13: Distribute the Proceeds to the Claimants
Step 14: Prepare the Final Report by the Liquidator
Step 15: Liquidator’s application for corporate dissolution
Compulsory winding up of a company
A creditor requests the High Court to wind up the affairs of an insolvent limited company in a compulsory winding up. The conclusion of this legal process results in the removal of the Company from the Companies House registry, essentially ending its existence.
The High Court chooses the Official Receiver (OR) to serve as a liquidator once the order has been made. The Official Receiver investigates how and why a person went bankrupt, or a firm was forced into compulsory liquidation while working for the Insolvency Service.
Procedure for compulsory winding up
Step1: The filing of a petition for the winding up of a corporation is the first step, and as was said above, only certain kinds of people may file the petition.
Step 2: The Company’s Statement of Affairs must be included with the petition, as filed.
Step 3: Petition for dissolution of the Company should be publicized in the manner described below;
- The dissolving Company must use Form 6 for the advertisement.
- The ad should run for at least 14 days in a daily journal.
- The advertisement should be written in both English and the local dialect of the area.
Step 4: The business must deliver fully audited books of accounts. The Tribunal will issue an order for the Company to be dissolved or wound up if it determines that the accounts are in order and all required compliance has been met by the Company.
Step 5: Following the Tribunal’s ruling, the registrar will publish a notice informing the public that the Company has been dissolved.
Reason for winding up
- A Private Limited Company (PVT) is a business entity created following the Companies Act. Consequently, a firm must maintain its regular compliances throughout its life cycle.
- For a company that is not functioning and wants to avoid compliance obligations, the winding-up process is used.
- An application for the closure of a firm must be disclosed to the ministry of corporate Finance within three to six months. You can finish the entire process online.
- If a firm doesn’t submit its compliances on time, it will be fined and penalized, and its directors will be barred from establishing new companies. It is preferable to dissolve an inactive corporation to avoid future fines or liabilities.
- Rather than keeping a dormant company in compliance, it is better to wind up a corporation again when appropriate.
- A corporation that complies with all regulations can be readily liquidated. If there are any past-due compliances, they must first be regularized.
Documents required for winding up a company
- When winding up a company, the following documents are necessary:
- Copy of the board resolution
- Copy of the creditors’ resolution stating that three-fourths of the members have accepted it,
- Copy of the company’s incorporation document
- Memorandum of association and articles of association
- Certification related to the closure of the Company’s bank account
- Statement of accounts.
- Form STK-2 (Steps for winding up a defunct or Dormant Company)
- Winding Up Petition (Form WIN 1 or WIN 2)
- Statement of Affairs in the Format of Form WIN 4
- Affidavit of Concurrence follows the pattern of Form WIN 5
- Publicity in the Newspaper (Form WIN 6)
- Appointment of Provisional Liquidator in the Format WIN 7 and 8 (This would only be used for the fast track procedure which the courts carry out)
A corporation may choose to close either voluntarily or involuntarily. Proper dissolution is required to avoid any unwanted issues. The Company may be dissolved at any time at the request of its shareholders. All the outstanding debts must be cleared regardless of whether there are employees, secured or unsecured creditors, or both.
After obligations are settled, all business bank accounts must be closed. If the company is dissolved, the GST registration must likewise be surrendered. Following the surrender of all registrations, a petition for winding up may be submitted to the Ministry of Corporate Affairs. Once all the documents are duly signed and filed, the company officially ceases to exist.