Liquidation or winding up is a legal term and refers to the procedure through which the affairs of a company are wound up by law. Winding up of a company has been defined in the Companies Act, 1956 as “the process whereby its life is ended and its property is administered for the benefit of its creditors and members. An Administrator, called a Liquidator, is appointed and he takes control of the Company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”
A company being a creation of law, cannot die a natural death. It comes to an end by law through the process of liquidation or winding up. On liquidation the affairs of a company are wound up and its name is struck off from the Register of Companies maintained by the Registrar of Companies.
Liquidation is different from insolvency. The term ‘insolvency’ is applicable to individuals, partnership firms and Hindu undivided families whereas, the term ‘liquidation’ is applicable to a joint stock company. But i! may he mentioned, that the insolvency of a company is not a necessary condition for its liquidation whereas an individual or a partnership firm or Hindu undivided family is said to be insolvent when liabilities exceed assets or has committed an act of insolvency. A solvent company can also he liquidated as we will see in the course of discussion. Another difference between insolvency and liquidation is that the former is governed by the Insolvency Act and the latter is governed by the Companies Act.
Modes of Winding up or Liquidation
Section 425 (1) of the Companies Act provides that a company can be liquidated in any of the following three ways :
(i) Compulsory winding up by the court ;
(ii) Voluntary winding up by the members or creditors ;
(iii) Winding up under the supervision of the court.
Generally (unless the contrary appears), the provisions of the Act with respect to winding up apply to winding up of a company whether it he by the court or voluntary or subject to the supervision of the court [Section 425 (2)].
Consequences of Winding Up
The following are the consequences of winding up:
1. An officer, called a liquidator is appointed and he takes over the administration of the company. In case of compulsory winding up, the official liquidator attached to the High Court, functions as liquidator of the company. In case of voluntary winding up by members, such an official is appointed by the members and in case the voluntary winding up is by creditors, both the members and creditors may appoint such an official. In case members and creditors appoint different persons as liquidators, the creditors’ nominee shall act.
2. The powers of the Board of Directors will cease and will now vest the liquidator.
3. Winding up order or resolution of voluntary winding up shall operate as a notice of discharge to all members of the company. The members of the company will be known as contributions.
4. Liquidator of the company will prepare a list of the contributions who may be made liable to contribute to the assets of the company in case assets are not sufficient to meet the claims of various claimants. In case there is a surplus in the assets, the liquidator of the company will prepare a list of those members, who are entitled to share this surplus.
5. Liquidator of the company will collect and realize its assets and distribute the proceeds among right claimants as per the procedure of the law.
6. Winding up ultimately leads to dissolution of a company. The company’s life will come to an end and it will be no more an artificial person in the eyes of the law.