The Concept of Liquidation/Winding Up in IndiaLubinisha Saha, Advocate, J Sagar Associates, New Delhi, India and Rohit Kumar, Advocate, J Sagar Associates, New Delhi, India

Bankruptcy and winding up

Bankruptcy of a company is not the same thing as winding up of a company. Whereas

Indian law does not define bankruptcy, it defines winding up under the (Indian)

Companies Act, 1956 (the ‘Act’).

The most important difference between bankruptcy and winding up is that in a

bankruptcy proceeding the property of the bankrupt passes to a trustee who is

appointed by a court to sell the property to pay the debts of the bankrupt party.

However, in a winding up of a company, all the assets of the company still remain with

the company until its dissolution, unless disposed of in the course of winding up by the

liquidator.

In the event of an Indian company registered under the Act becoming insolvent, it is

‘winding up’ that is applicable. These provisions apply equally to a listed company, a

public limited company as well as a private limited company. The provisions of the Act

guide the entire winding-up process The terms ‘winding up’ and ‘dissolution’ are

sometimes

erroneously used to mean the same thing. However, they are quite different in their

meanings. Winding up is a process whereby all assets of the company are realised and

used to pay off the liabilities and members. Dissolution of the company takes place

after the entire process of winding up is over. Dissolution puts an end to the life of the

company. A dissolution order passed by the court is like the death certificate of the

company. As the concept of bankruptcy is not of much relevance in India, for the

purposes of this article, the focus is on the concept of winding up.

The terms winding-up proceedings and liquidation proceedings are used

interchangeably in this article.

Meaning and types of liquidation

Winding up of a company is the process whereby its life is ended and its property is

administered for the benefit of its creditors and members. The court appoints an

administrator,called a ‘liquidator’, who takes control of the company, takes possession

of its assets and finally distributes any surplus among the shareholders in accordance

with their respective rights. The objective behind the winding up of a company is to

realise the assets, pay off the liabilities and distribute the surplus as expeditiously as

possible.

Under section 425 of the Act, a company may be wound up in any one of the following

three ways:1

(a) by the court2 making a winding-up order (compulsory

winding up);

(b) by passing of an appropriate resolution for voluntary

winding up at a general meeting of members (voluntary winding up); and

(c) voluntary winding up subject to supervision of the court.

Voluntary winding up

In the case of voluntary winding up, the entire process is done without court

supervision. When the winding up is complete, the relevant documents are filed before

the court for obtaining the order of dissolution. A Examples of

Liquidation Preferences

Liquidation preferences are a common thing to see in a term sheet. Although

many sites break down what liquidation preferences mean, I hardly see

examples of each preference. I decided to break down the common

liquidation preferences with examples for easy reference.

Liquidation PreferencesA liquidation preference is the ability for the investors to take there money

out before the money left over is divided among the shareholders. This

typically is a 1x (meaning the investors get their original investment back),

but can be higher.

Example: The company has 100,000 outstanding shares. They previously

took a $500k investment. The company sells for $5mm. The investors have a

liquidation preference of 2x their investment. Since they invested $500k,

they take $1mm from the $5mm sell amount. The $4mm remaining is then

split among the 100,000 outstanding shares. Investors = $1m for $500k.

Shareholders = $4mm.

ParticipationUpon a liquidation event, the investors participate with the other

shareholders. If the investors have a liquidation preference with participation

they have the ability double dip at the liquidation event. An important note,

there is full participation (the example below), non-participating (example

above), and capped participation, meaning there is only so much the

investors can take then it stops.

Example: The company has 100,000 outstanding shares. They take a $500k

investment at a $2mm valuation. The investors receive 20% of the company

and another 25,000 shares are issued to the investors. The company sells for

$5mm. The investors have a liquidation preference of 2x their investment.

Since they invested $500k, they take $1mm from the $5mm sell amount. The

$4mm remaining is then split among the 125,000 outstanding shares. The

extra 25,000 the investor gets to "participate in," making each share valued

at $32.00 ($4mm / 125,000). Investors = $1.8mm. Shareholders = $3.2mm.

Senior Liquidation PreferenceThis comes into play when a company has taken multiple series of

investments. The most recent investor is senior to to the others, meaning

they get there money first.

Example: The company takes a series A liquidation preference of $10m and

a series B senior liquidation investment of $20m. If the company exits for

$25m the series B investors take $20m, leaving only $5m for the series A

investor.

Junior Liquidation PreferenceThe exact opposite of a senior liquidation preference. The oldest investor is

more senior than the newer investor. First money in, is first money out.

Example: The company takes a series A liquidation preference of $10m and

a series B junior liquidation investment of $20m. If the company exits for

$25m the series A investors take $10m, leaving only $15m for the series B

investor.

Pari Passu Liquidation PreferenceSomething which sounds complicated but isn't. This means the series B and

series A investors are "equal" to each other. They take their investments out

of the company proportionally (pro-rata).

Example: The company takes a series A liquidation preference of $10m

(They took 20% of the company) and a series B pari passau liquidation

investment of $20m (They took 20% of the company). The company exits for

$30m. Series B investor has a 2:1 investment over the A investor, so for each

$2 investor B takes, investor A gets $1. Investor A: $8,333,333 Investor B:

$16,666,666.

Hopefully these examples help you. Let me know if this was helpful or

confusing for you.

voluntary winding up may be done by the members or the creditors.

LiquidationFrom Wikipedia, the free encyclopedia

"Winding up" redirects here. For other uses, see Wind up (disambiguation).

Not to be confused with liquefaction, a concept in physics.

The examples and perspective in this article deal primarily with the United Kingdom and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (December 2010)

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (September 2009)

Look up liquidation in

Wiktionary, the free

dictionary.

In law, liquidation is the process by which a company (or part of a company) is brought to an end, and the

assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-

up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of

liquidation also arises when customs, an authority or agency in a country responsible for collecting and

safeguardingcustoms duties, determines the final computation or ascertainment of the duties or drawback

accruing on an entry.[1]

Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation) or voluntary

(sometimes referred to as a shareholders' liquidation, although some voluntary liquidations are controlled

by the creditors, see below).

Contents

  [hide]

1 Compulsory liquidation

o 1.1 Grounds

o 1.2 The order

2 Voluntary liquidation

3 Misconduct

4 Priority of claims

5 Dissolution

6 Striking off the Register

7 Phoenix companies

8 As a metaphor

9 See also

10 Footnotes

[edit]Compulsory liquidation

The parties who are entitled by law to petition for the compulsory liquidation of a company vary from

jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory

liquidation of a company by:

the company itself

any creditor who establishes a prima facie case

contributories[2]

the Secretary of State (or equivalent)

the Official Receiver

[edit]Grounds

The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the

normal grounds to enable an application to the court for an order to compulsorily wind-up the company are:

the company has so resolved

the company was incorporated as a corporation, and has not been issued with a trading certificate (or

equivalent) within 12 months of registration

it is an "old public company" (i.e. one that has not re-registered as a public company or become a

private company under more recent companies legislation requiring this)

it has not commenced business within the statutorily prescribed time (normally one year) of its

incorporation, or has not carried on business for a statutorily prescribed amount of time

the number of members has fallen below the minimum prescribed by statute

the company is unable to pay its debts as they fall due

it is just and equitable to wind up the company[3]

In practice, the vast majority of compulsory winding-up applications are made under one of the last two

grounds.

An order will not generally be made if the purpose of the application is to enforce payment of a debt which

is bona fide disputed.[4]

A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to

equitable considerations. It can take account of personal relationships of mutual trust and confidence in

small parties, particularly, for example, where there is a breach of an understanding that all of the members

may participate in the business,[5] or of an implied obligation to participate in management.[6] An order might

be made where the majority shareholders deprive the minority of their right to appoint and remove their

own director.[7]

[edit]The order

Once liquidation commences (which depends upon applicable law, but will generally be when the petition

was originally presented, and not when the court makes the order),[8] dispositions of the company's property

are generally void,[9] and litigation involving the company is generally restrained.[10]

Upon hearing the application, the court may either dismiss the petition, or make the order for winding-up.

The court may dismiss the application if the petitioner unreasonably refrains from an alternative course of

action.[11]

The court may appoint an official receiver, and one or more liquidators, and has general powers to enable

rights and liabilities of claimants and contributories to be settled. Separate meetings of creditors and

contributories may decide to nominate a person for the appointment of liquidator and possibly of

supervisory liquidation committee.

[edit]Voluntary liquidation

Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of

the company and dissolve. Voluntary liquidation begins when the company passes the resolution, and the

company will generally cease to carry on business at that time (if it has not done so already). If the

company is solvent, and the members have made a statutory declaration of solvency, the liquidation will

proceed as a members' voluntary winding-up. In such case, the general meeting will appoint the

liquidator(s). If not, the liquidation will proceed as a creditor's voluntary winding-up, and a meeting of

creditors will be called, to which the directors must report on the company's affairs. Where a voluntary

liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed.

Where a voluntary winding-up of a company has begun, a compulsory liquidation order is still possible, but

the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the

contributories.

In addition, the term liquidation is sometimes used when a company wishes to divest itself of some of its

assets. This is used, for instance, when a retail establishment wishes to close stores. They will sell to a

company that specializes in store liquidation instead of attempting to run a store closure sale themselves.

Since 1 March 2012, changes in tax legislation (specifically the removal of ESC C16) have meant Members

Voluntary Liquidations (MVLs) can be a tax efficient method of shareholders extracting funds from a

redundant company. If a company's assets exceed £25,000, upon strike off any distributions would be

taxed on the shareholders as dividends, whereas via an MVL distributions would be treated as capital

gains receipts. Because of this legislative change, the demand for cheap MVLs has increased significantly.

[edit]Misconduct

Main articles: Fraudulent trading, Undervalue transaction, Unfair preference and Wrongful trading.

The liquidator will normally have a duty to ascertain whether any misconduct has been conducted by

those in control of the company which has caused prejudice to the general body of creditors. In some

legal systems, in appropriate cases, the liquidator may be able to bring an action against errant

directors or shadow directors for either wrongful trading or fraudulent trading.

The liquidator may also have to determine whether any payments made by the company or

transactions entered into may be voidable as a transaction at an undervalue or an unfair preference.

[edit]Priority of claims

See also: Secured creditor, Preferential creditor and Unsecured creditor

The main purpose of a liquidation where the company is insolvent is to collect in the company's

assets, determine the outstanding claims against the company, and satisfy those claims in the

manner and order prescribed by law.

The liquidator must determine the company's title to property in its possession. Property which is

in the possession of the company, but which was supplied under a valid retention of title clausewill

generally have to be returned to the supplier. Property which is held by the company on trust for

third parties will not form part of the company's assets available to pay creditors.[12]

Before the claims are met, secured creditors are entitled to enforce their claims against the assets

of the company to the extent that they are subject to a valid security interest. In most legal

systems, only fixed security takes precedence over all claims; security by way of floating

charge may be postponed to the preferential creditors.

Claimants with non-monetary claims against the company may be able to enforce their rights

against the company. For example, a party who had a valid contract for the purchase of land

against the company may be able to obtain an order for specific performance, and compel the

liquidator to transfer title to the land to them, upon tender of the purchase price.[13]

After the removal of all assets which are subject to retention of title arrangements, fixed security,

or are otherwise subject to proprietary claims of others, the liquidator will pay the claims against

the company's assets. Generally, the priority of claims on the company's assets will be determined

in the following order:

1. Liquidators costs

2. Creditors with fixed charge over assets

3. Costs incurred by an administrator

4. Amounts owing to employees for wages/superannuation (director limit $2000)

5. Payments owing in respect of workers's injuries

6. Amounts owing to employees for leave (director limit $1500)

7. Retrenchment payments owing to employees

8. Creditors with floating charge over assets

9. Creditors without security over assets

10. Shareholders (Liquidating distribution)

Unclaimed assets will usually vest in the state as bona vacantia.

[edit]Dissolution

See also: Dissolution (law)

Having wound-up the company's affairs, the liquidator must call a final meeting of the members (if

it is a members' voluntary winding-up), creditors (if it is a compulsory winding-up) or both (if it is a

creditors' voluntary winding-up). The liquidator is then usually required to send final accounts to

the Registrar and to notify the court. The company is then dissolved.

However, in common jurisdictions, the court has a discretion for a period of time after dissolution

to declare the dissolution void to enable the completion of any unfinished business.[14]

[edit]Striking off the Register

In some jurisdictions, the company may elect to simply be struck off the Register as a cheaper

alternative to a formal winding-up and dissolution. In such cases an application is made to the

Registrar, and they may strike off the company if there is reasonable cause to believe that the

company is not carrying on business or has been wound-up and, after enquiry, no case is shown

why the company should not be struck off.[15]

However, in such cases the company may be restored to the Register if it is just and equitable so

to do (for example, if the rights of any creditors or members have been prejudiced).[16]

In the event the company does not file an annual return or annual accounts, and the company's

file remains inactive, in due course, the Registrar at Companies House will strike the company off

the register.

[edit]Phoenix companies

In the UK, many companies in debt decide it's more beneficial to start again by creating a new

company, often referred to as a 'phoenix' company. In business terms this will mean liquidating a

company as the only option and then resuming under a different name with the same customers,

clients and suppliers. In some circumstances it may appear ideal for the directors, however if they

trade under a name which is the same or substantially the same as the company in liquidation

without approval from the Court they will be committing an offence under S216 of the Insolvency

Act 1986 (and equivalent legislation in UK regions). Persons participating in the management of

the 'Phoenix' company may also be held personally liable for the debts of the company under

s217 of the Insolvency Act unless the Court approval has been granted.

[edit]As a metaphor

In informal usage, "liquidation" can mean the murder of a person or group who threatens a

country or political organisation.[17]

Liquidation

1

What It Is:

Liquidation refers to the selling of assets in return for cash. 

How It Works/Example:

The term liquidation is most often used in discussions about Chapter 7 bankruptcy -- a section of U.S. bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts.

Individuals, partnerships or corporations can liquidate assets. Here's how liquidation works in the case of bankruptcy.

IndividualsTo file Chapter 7, the debtor files a petition with the local bankruptcy court. (In some cases,

creditors can force a debtor into Chapter 7 by filing the petition themselves.) The debtor must provide the court with financial and tax information, as well as a list of creditors and outstanding debts. In most cases, the court also requires proof that the individual has obtained credit counseling. Filing the Chapter 7 petition automatically stops most collection actions against the debtor, including lawsuits, garnishments, and phone calls.

The U.S. trustee (or the court itself, in some states) then appoints an impartial trustee to handle the case and liquidate the debtor's assets. If all the debtor's assets are exempt or subject to liens, there may not be any assets to liquidate and hence no money to distribute to creditors. If there are assets to liquidate, however, the creditors usually file a written claim so that they can receive some of the proceeds. The trustee handles the liquidation and determines which creditors are paid first.

Ultimately, a judge decides whether to discharge an individual's debt. The judge can deny the discharge if the debtor failed to keep adequate records, failed to explain the loss of any assets, committed a crime, disobeyed court orders, or did not seek credit counseling. Alimony, child support, and student loans generally cannot be discharged in a Chapter 7 case, nor can most judgments against the debtor for criminal acts.

BusinessesThe procedure for filing Chapter 7 bankruptcy is very similar for businesses. Public companies must also file a form 8-K with the SEC to notify shareholders of the bankruptcy proceedings.

Most companies do not file Chapter 7 until they've been unsuccessful with a Chapter 11 filing, which lets them attempt to restructure the company and restore the ability to service debt. In Chapter 7, a company ceases operations, and the appointed trustee liquidates the company's assets in order to repay its debts.

Lenders whose debt is backed by collateral are generally repaid first (via the receipt of the collateral), followed by the unsecured lenders and then the shareholders. In many cases, unsecured bondholders receive only pennies on the dollar. Shareholders almost never receive anything.

Why It Matters:

Liquidation is usually the last step in the effort to repay debt. However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money in the future.

For businesses, liquidation usually means closing for good and selling off all the assets. In the end, if a company's stock or bonds are deemed worthless by the bankruptcy court, investors might be able to deduct their losses on their tax returns.