Liquidation

LIQUIDATION

What does liquidation mean? 

When starting a company in India, investors should take into consideration that some of the businesses may enter the liquidation procedure due to a set of factors (faulty management, economic issues, low demand and others). According to the Indian legislation, the liquidation procedure refers to the manner in which the company’s assets are terminated and distributed to the entitled parties. 

The liquidation can be started on a voluntarily basis through the intervention of the company’s creditors or other members. If this case will apply, the procedure can be completed without the intervention of a local court and our team of specialists in company formation in India can assist with further advice on the manner in which the procedure is performed.

Who can start the liquidation procedure in India? 

The liquidation procedure in India is initiated by filing a petition for insolvency. The steps for the liquidation process in India are prescribed under the Insolvency and Bankruptcy Code. The initial steps can be taken, as mentioned above, by the company’s creditors, but they can also be started by the company’s owners. It may also be started by the company’s contributors or by the Indian institutions. 

In the latter case, the main institutions that can request this procedure are the country’s government or the Registrar of Companies. Once the petition was filed, it is legally required to present the respective petition in a local newspaper for a period of minimum 14 days. The advertisement must be in the language of the Indian region where the company resides, but also in English. Our team of consultants in company registration in India can provide more details on other necessary steps imposed in this case. 

Voluntary liquidation in India   

Liquidation is necessary when thecompany has to pay a large amount of money as debts to various parties. Through the voluntary liquidation, the directors of a solvent company will sign a formal declaration of solvency. The directors will need toappoint a general board meeting in which the decision of winding up the company will be established (it can be completed if two thirds of the members are in favor of this proposal). 

Then, the company’s representatives will need to appoint a liquidator, who can handle the legal procedure and to notify the Registrar of Companies on the company’s current situation (in a period of maximum 10 days since the resolution was signed). Our team of agents in company formation in India can offer further information on the legal aspects related to the voluntary liquidation. 

The main steps of the voluntary liquidation in India

Although the voluntary liquidation in India represents an out-of-court procedure, there are a set of steps that have to be concluded by those who have initiated the procedure. Our team of specialists, who can assist investors in opening a company in India, can also provide full legal advice on the steps regarding the voluntary liquidation, which generally refer to the below mentioned aspects: 

the company’s management has to follow the requirements imposed under the Indian Companies Act;

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thus, the majority of the company’s directors has to approve on the liquidation procedure, by signing a board resolution

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the majority of the company’s shareholders also has to approve on this, by signing a special resolution

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the special resolution has to be signed by at least three quarters of the company’s shareholders

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the company’s creditors must also state that they agree on the winding-up

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it is also required to create a declaration of solvency and to appoint a liquidator, who will be in charge with making a report regarding the company’s current financial situation (capital, assets and so on). 

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Can a shelf company be liquidated in India? 

Yes, the shelf company (also referred to as a dormant company) can be shut down in India. The shelf company represents a legal entity that was incorporated at a given time in the past, with the purpose of being sold. This type of business represents a simpler way for a businessman to start a local business, as the incorporation process has already been completed. 

However, such companies can also be shut down, provided that there is no demand for them on the local market. A dormant company in India, which is also characterized by the fact that it did not enter any commercial activities, can be shut down as stipulated under the Companies Act 2013. Since this type of business did not enter commercial activities, there are no financial documents that need to be audited, in order to estimate its current situation. 

Thus, the Indian government offers the possibility of a fast liquidation procedure. In this sense, the owners of a dormant company have to complete a form, the Form STK-2, with the Registrar of Companies, this being the main step in order to complete the liquidation of the business.  

The document will need to be signed by the company’s director and in order to benefit from this faster liquidation procedure (known in India as the Fast Track Exit Scheme), the company is required to be dormant (meaning, not to have any commercial activities) for at least a year prior to starting the liquidation. 

What is the compulsory liquidation in India? 

The compulsory liquidation procedure is also 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.

Under the Indian legislation, a period of 180 days is prescribed once the creditor entered his or her application with the National Company Law Tribunal, a period in which the recovery of the assets or the enforcement procedures can’t be started. It is necessary to know that the 180 days period can be extended with an additional 90 days.  

As a general rule, the liquidation procedure in India can last up to two years (it can be completed in two years since the application was made), but this is the case of compulsory liquidation, as the voluntary liquidation can take much less time.

The voluntary liquidation in India can be started by the following parties: creditors and members. However, another type of liquidation can apply against the wish of the company’s directors, namely – the compulsory liquidation, if the respective legal entity can no longer pay its financial obligations. The compulsory liquidation is a procedure which falls under the supervision of the local courts and our team of specialists in company registration in India can assist with more details. 

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