What is Liquidation?
Liquidation is closing down a company and dividing its assets to creditors and owners. It’s also called winding-up or dissolution, with dissolution being the final stage of liquidation.
A company can liquidate in two ways:
- Compulsory Liquidation – Ordered by a court or regulatory authority.
- Voluntary Liquidation – Initiated by the company itself when it decides to shut down.
In some cases, companies may liquidate some assets without shutting down entirely, like a retail chain closing some of its stores.
Liquidation Under the Insolvency & Bankruptcy Code (IBC)
IBC first prioritizes business recovery. If no recovery plan is available, liquidation is the last step.
When Can a Liquidation Order Be Passed?
The Adjudicating Authority (National Company Law Tribunal - NCLT) can pass a liquidation order in these situations:
- No recovery plan is received within the deadline.
- NCLT rejects the submitted recovery plan.
- The Committee of Creditors (CoC) votes for liquidation.
- The corporate debtor fails to comply with the approved recovery plan.
Role of the Liquidator
Once liquidation is ordered, a liquidator is appointed to manage the process. The resolution professional handling the corporate insolvency resolution process (CIRP) can act as the liquidator unless replaced by the adjudicating authority.
The liquidator will:
- Sell assets of the company.
- Distribute proceeds to creditors and shareholders.
- Follow legal procedures.
In some cases, the liquidator may sell the business as a going concern, so the operations can continue under new ownership.
Key Takeaways
Liquidation is the last resort when a company cannot be revived. The process ensures fair distribution of assets and compliance with legal frameworks like IBC. Understanding liquidation helps businesses and investors manage financial risks better.
