India Company Liquidation

Businesses may opt for the liquidation procedure due to a set of factors, such as voluntary winding up, economic issues, low demand, among others. The liquidation procedure is given by the Insolvency and Bankruptcy Code and the procedure refers to the way the company’s assets and liabilities are terminated and distributed to the entitled parties.

Contributing Advisor

Krishan Aggarwal

Senior Manager, International Business Advisory

The liquidation may be triggered voluntarily by company or by creditors and members or by NCLT (National Company Law Tribunal).

Starting the liquidation procedure in India

The procedure is initiated by filing a petition for insolvency. The steps are prescribed under the Insolvency and Bankruptcy Code. The company’s creditors or the company’s owners can take the initial steps. The company’s contributors or the Registrar of Companies (ROC) may also start the proceedings

Voluntary liquidation in India

A voluntary liquidation procedure can be initiated by a corporate person in a no-default situation, where the corporate debtor has not defaulted on any debt to any person.

Conditions for voluntary liquidation in India

• The company’s management must follow the requirements imposed under the Indian Companies Act.
• The majority of the company’s directors must approve the liquidation procedure by signing a board resolution. They have to make a declaration verified by an affidavit stating:

• They have made a full inquiry into the affairs of the company, and they are of the opinion that either the company has no debt or that it will be able to pay its debts in full of the proceeds of assets to be sold in the voluntary liquidation; and
• The company is not being liquidated to defraud any person.

• This declaration must be supported by the following documents –

• Audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later; and
• A report of the valuation of the assets of the company, if any, prepared by a registered valuer of assets of the corporate person at the time of declaration of its solvency by majority of directors, designated partners, or individual constituting the governing board, as the case may be, of the corporate person.

Several scenarios might lead a company to opt for voluntary liquidation:

• While the company may not be entirely insolvent, it might be on the brink of insolvency. The management might choose voluntary liquidation to avoid a more chaotic compulsory liquidation process, ensuring a controlled wind-down of operations.
• Companies often form for specific projects or limited objectives. Once these are accomplished, and there is no further business scope, the company may opt for voluntary liquidation.
• A parent company may decide to liquidate a subsidiary if it no longer aligns with its core business strategy or if it decides to reallocate resources elsewhere.
• Adverse market conditions that significantly affect profitability and future viability may lead the company to choose liquidation as a practical exit strategy.
• Irresolvable disputes among shareholders or directors can sometimes make voluntary liquidation a preferred option to amicably close the business and distribute assets.

Voluntary liquidation offers several advantages:

• Unlike compulsory liquidation, voluntary liquidation allows the company’s management to control the process, making strategic decisions on asset sales and creditor settlements.
• By proactively choosing liquidation, companies can reduce potential legal disputes and liabilities, providing a clearer path to resolution.
• Voluntary liquidation often helps maintain better relationships with creditors, as they are more likely to receive payments or settlements compared to compulsory liquidation scenarios.
• It provides a clean exit for the business, allowing the company to settle its debts, sell its assets, and legally dissolve without leaving unresolved obligations.
• Voluntary liquidation can often be less costly than court-ordered liquidation, saving the company from additional legal expenses and prolonged proceedings.

Procedure for Voluntary Liquidation in India

• The company’s management must follow the requirements imposed under the Indian Companies Act.
• The majority of the company’s directors must approve the liquidation procedure by signing a board resolution. They have to make a declaration verified by an affidavit stating:
  • They have made a full inquiry into the affairs of the company, and they are of the opinion that either the company has no debt or that it will be able to pay its debts in full of the proceeds of assets to be sold in the voluntary liquidation; and
  • The company is not being liquidated to defraud any person.

• The majority of the company’s shareholders must approve triggering the liquidation procedure by signing a special resolution. The special resolution must be signed by at least three quarters of the company’s shareholders. The company’s creditors must state that they agree on the wind-up within seven days of the resolution passed in the general meeting. The commencement date of the liquidation process will be date of the resolution, subject to approval of creditors.
• The company will notify the ROC within seven days of passing the general meeting resolution or creditors approval, whichever the case may be.
• Once the liquidator is appointed by the shareholders, they will perform their duties under the Insolvency and Bankruptcy Code. These include inviting and verifying claims against the company, taking custody of all assets of the company, selling the liquidation estate, and distributing the assets to the stakeholders as per the prescribed waterfall mechanism. Once the assets have been completely liquidated, the liquidator makes an application to the NCLT for dissolution of the company. Once the dissolution order is passed by the NCLT, the company stands to be dissolved.

Key points for voluntary liquidation in India

• The term “corporate debtor” is substituted with “corporate person”
• A timeline for preparation of the list of stakeholders if no claims are received is within 15 days from the last date for receipt of claims;
• The time period for distribution of proceeds from realization to the stakeholders is 30 days from the receipt of the amount;
• Time taken for completion of the liquidation process:

• 270 days from the date of the initiation of the process – in cases where claims have been received from creditors.
• 90 days in cases where no claims have been received from any creditor.

• The liquidator shall submit the final report and the compliance certificate in Form-H; and
• Time limit for intimating the IBBI about the appointment of the insolvency professional as a liquidator is seven days.

Voluntary liquidation in India involves specific legal requirements and potential liabilities for directors and officers. Penalties for non-compliance such as fines, imprisonment, liabilities, and other legal obligations may occur.

Compulsory liquidation in India

The compulsory liquidation procedure falls under the supervision of the local courts and is prescribed under the Insolvency and Bankruptcy Code of India.

The procedure can be started when one of the company’s creditors requests the payment of a debt of at least INR 100,000. The creditor can request the beginning of the compulsory insolvency procedure at the National Company Law Tribunal (NCLT).

A period of 180 days is prescribed once the creditor submits their application with the NCLT. During this period – the recovery of assets or enforcement procedures cannot be initiated. This 180-day period can be extended by an additional 90 days. In general practice, the compulsory liquidation procedure can take up to two years (calculated since the application was made).

Liquidation of dormant company in India

A shelf company or dormant company can also be shut down. A fast-track procedure has been introduced to close a defunct or dormant company via the STK-2 form. The Registrar of Companies must file the STK-2 form and the director of the company must sign it upon due authorization by its board.

Under this scheme, a dormant or defunct company is defined as one that:  

• Has no assets or liability;
• No business activity since incorporation; or
• No business activities carried out in the year prior to applying for the Fast Track Exit (FTE) Scheme.

Step-by-step guide for filing the STK-2 form

The STK-2 form is used to apply for the voluntary striking off of a company’s name from the Register of Companies under Section 248(2) of the Companies Act, 2013. Here’s a step-by-step guide on how to file it:

• Convene a board meeting to approve the strike-off and authorize a director to submit the STK-2 form.
• Call a general meeting to pass a special resolution or obtain consent from 75% of members.
• File the resolution with the ROC in Form MGT-14 within 30 days.
• Ensure all liabilities are cleared and obtain a no-dues certificate from relevant authorities.
• Prepare the following:

• Indemnity bond (Form STK-3)
• Affidavit by directors (Form STK-4)
• Statement of accounts certified by a CA (up to 30 days before application)
• Copy of special resolution or member consent
• Closure of bank account certificate from the bank
• Last filed Income Tax Return
• List of pending litigations, if any

• Log in to the MCA portal.
• Fill out and complete Form STK-2.
• Upload necessary documents.
• Pay the prescribed fee.
• Submit the form online.

ROC issues a public notice in form STK-6 for stakeholders. Wait for 30 days for objections. If no objections, ROC strikes off the company’s name and publishes the notice in STK-7. Incomplete documentation, non-compliance, unsettled liabilities, and legal cases are some of the reasons for rejection.