Understanding Compulsory Liquidation in India

Learn about the Conditions and Procedure of Compulsory Liquidation of Indian Companies

Liquidation of a company is when a business closes. It is when a firm’s assets are sold, accounts are settled, and the remaining assets are distributed among the shareholders. We know that establishing a company is a complex, but what we do not seem to register is that winding up the company is even more complicated as it acts as a separate legal entity.

Generally, there are two types of company liquidation:

1. Compulsory Liquidation
2. Voluntary Liquidation

Before starting a company you should learn about compulsory liquidation and be clear about the circumstances that can lead to it.

 

Compulsory Liquidation of the Company

When the court or tribunal orders a registered company under the ordinance to be liquidated, it is known as the company’s compulsory liquidation. If you are wondering why a court would pass such a judgement, then you must know that there are many circumstances which can lead to such decisions. There are laws under the Companies Act 2013, which lead to the tribunal to order the company to be wind up. We list these circumstances:

• If any of the company’s operation poses a threat to the integrity of the state or the country.
• In case the company fails to file its financial statement or annual returns for straight five years.
• If the court doubts that the company is fraudulently conducting its operations or its registration was to do illegal activities.
• If the court believes that it is valid to liquidate the company.

 

Petition for Liquidation

However, the court just does not realize that a company should shut down. It is only when a petition makes an application for the liquidation of the company. One of these people can make a petition:

1. The Company
2. The Creditors
3. The Registrar
4. Any Contributor
5. An authorized official of the central government
6. An authorized official of the state government

The central government should sanction the application before the registrar can file in the tribunal or the court. Also, the central government needs to give an opportunity to the company before sanctioning such an application. Additionally, the registrar needs to submit their views in the court within 60 days of the petition.

 

Actions Taken by Court

Once the Tribunal receives the petition for liquidation of the company, it needs to take action as soon as possible. These actions are predefined by the Companies act, 2013 and are listed below:

• Dismissal of petition
• Making an Interim order for the time being
• Appointment of a provisional liquidator
• Accepting the petition and order for the company’s liquidation.
• Passing any order as the tribunal seems to think appropriate.
• A tribunal must pass the order within 90 days of the petition.
• It is mandatory for the tribunal to give notice to the company and to allow it the opportunity to apply for a hearing before the appointment of the provisional liquidator.
• If someone other than the company files the petition, the tribunal allows the company to file an objection and submit a statement of affairs within 30 days of the notice.
• The directors and officers will have to submit the books of accounts to the liquidator.

 

The Procedure of Compulsory Liquidation of Company

Here is a step by step guide for compulsory liquidation:

1. The first step in liquidation of a company is filing the petition by any of the authorities as we mentioned above.
2. The authorities need to submit the petition along with a statement of affairs.
3. The petition should be advertised in a daily journal for 14 days under form 6, and the advertisement must be in the regional language and in English.
4. The company has to submit the audited account books. The tribunal will pass the order for liquidation of the firm only if it finds out that the accounts are in order.
5. After the order of the Tribunal, notice to the official gazette will be issued by the registrar announcing that the company is liquidated.

 

Winding up a company is even more complex than establishing it. If you are planning on dissolving your company, you need the assistance of someone who has the right knowledge of the process and how the Compulsory Liquidation works. Reach out to 3E Accounting for Liquidation Secretary Services. We lead a team of professionals who have years of experience in providing secretary services along with many other business services. Contact us via email or phone and talk to our consultants for guidance.