Liquidation - Introduction

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What is Liquidation?

Liquidation is the process of winding up a company's affairs by selling its assets, settling liabilities, and distributing any remaining funds to shareholders. It marks the end of a company's legal existence.

Types of Liquidation

  1. Voluntary Liquidation – Initiated by the company's members or creditors when the business is no longer viable.
  2. Members’ Voluntary Liquidation (MVL): When the company is solvent but chooses to close.
  3. Creditors’ Voluntary Liquidation (CVL): When the company is insolvent and unable to pay debts.
  4. Compulsory Liquidation – Ordered by a court when a company fails to pay creditors or violates legal regulations.

Key Participants in Liquidation

  • Liquidator – A professional appointed to oversee the process, sell assets, and distribute funds.
  • Creditors – Entities or individuals to whom the company owes money.
  • Shareholders – Owners of the company who receive any remaining funds after debt settlement.

Process of Liquidation

  • Appointment of Liquidator
  • Sale of Assets
  • Settlement of Liabilities (Creditors & Debentures Paid Off)
  • Distribution of Remaining Funds to Shareholders
  • Dissolution of the Company

Effects of Liquidation

  • The company ceases operations permanently.
  • Employees may lose their jobs.
  • Creditors receive payments based on priority.
  • Any surplus funds are distributed among shareholders.


Order of Payment

  1.  Secured Creditors
  2.  Cost of Liquidation (legal Charges, Liquidator's remuneration, winding up)
  3.  Preferential Creditors.
  4.  Debentures
  5.  Unsecured creditors.
  6. Pref. Shareholders.
  7. Equity Shareholders.
Explanation:

1.  Secured Creditors – Lenders with a legal claim on specific company assets, paid first from asset sales.(e.g., a bank with a mortgage on company property).

2. Cost of Liquidation – Expenses incurred in winding up, including legal fees and liquidator’s remuneration.(e.g., lawyer and auditor fees).

3. Preferential Creditors – Employees (unpaid wages), government (taxes), and other priority creditors.(e.g., unpaid salaries of staff).

4. Debentures – Company-issued debt; secured debentures are paid first, unsecured ones later.(e.g., bonds issued to raise funds).

5. Unsecured Creditors – Creditors without collateral, paid after secured and preferential creditors.(e.g., suppliers waiting for payment).

6. Preference Shareholders – Investors with fixed dividends, paid before equity shareholders in liquidation.

7. Equity Shareholders – Owners of the company, last to be paid and receive funds only if surplus remains.

Liquidator’s Remuneration :

The fee paid to the liquidator for managing the company’s liquidation process, including selling assets and paying creditors.  

Example: A court appoints a liquidator to close a failing company, and they receive a percentage of asset sales as payment.

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