Liquidation and winding up under companies act

LIQUIDATION PROCESS

• Liquidation process is the last stage where a creditors can recover their money from the company.
• First, the company go for the resolution process and if it doesn’t work then the company goes for the liquidation process.
• For recovering the money from the company, an auction is conduction to sale the assets of the company.
• The company first try to resolve the insolvency by Corporate Insolvency Resolution Process as per Chapter II of Part II of the code.

LIQUIDATOR

• Section 34 of the Code provides for the appointment of liquidator and the fees to be paid to him.
• According to section 5(18) of the Indian Bankruptcy Code, 2016, a "liquidator" means an insolvency professional appointed as a liquidator in accordance with the provisions of Chapter III or Chapter V of this Part, as the case may be.
• Once the liquidator is appointed then all the powers of the Board, KMP and all the partners of the debtor will be ceased and will be vested to the liquidator.
• Section 35 of the act provides the powers and duties of the liquidator, so that the liquidation proceeding gets complete.

WATERFALL ARRANGEMENT

Section 53 of the Code deals with the manner of distribution of assets in the process of liquidation. It specifies the order of distribution priority wise. This order of priority is known as "Waterfall Arrangement" since each person comes in priority. The proceeds of sale of asset shall be distributed in the following manner:

Cost incurred liquidation process and amount paid to insolvency professional in full.

Following debts shall rank equally between and among the following:

• Workmen's dues for the period of 24 months before initiation of process
• Debts owed to secured creditor by corporate debtors
• Wages and any unpaid dues owed to employees other than workmen for the period of 12 months
• Financial debts of unsecured creditors.

Following dues shall rank equally between and among the following:

• Any amount due to the Central / State Government including amount to be received on account of Consolidated Fund of India and Consolidated Fund of a State, if any, for the period of 2 years before initiation of process
• Debts owed to a secured creditor for any amount of security interest.
• Any remaining debts and dues.
• Preference shareholders; and
• Equity shareholders or partners in case of partnership firm or LLP.

WINDING UP

• Winding up is a process where the legal existence of company or LLP will be closed down.
• In this process the assets of the company are sold, all the liabilities of the companies are paid off and if there is any amount which is left then it is contributed to the contributories.
• Once the adjudicating authority are satisfied of the process then they will dissolve the company.
• During the process of winding up the powers of the company or LLP is with the liquidator and not with the partners or Board of Directors.
• Though, all the assets and liability will still belong to the company until the process is completed.
• Once the process is completed the company will lose its legal existence.

DIFFERNCE BETWEEN WINDING UP AND DISSOLUTION

Winding up

• Winding up is the first stage of dissolving the legal existence of an entity. In this stage, the assets of the entity are sold, its liabilities are paid off and surplus, if any, is distributed amongst the contributories.
• The winding up process is controlled by a liquidator. Creditors can prove their claims during winding up.
• Winding up need not result in dissolution in all cases. A company which is in winding up can be taken over or amalgamated by any other entity or company which will result in the company coming out of winding up process and being handed over to the shareholders.

Dissolution

• Dissolution is the final stage after completion of winding up process and the legal existence of the entity comes to an end.
• The dissolution can happen only by way of an order passed by the adjudicating authority.
• Creditor cannot prove their claim since the entity no longer exists.
• This is not possible in case of dissolution.