Liquidation Process

Businesses need swift and efficient procedures for closure or dissolution when they become insolvent. The law must, therefore, provide for the orderly market exit of unviable businesses. Insolvency procedures should help entrepreneurs close down unviable businesses and start viable ones as efficiently as possible. This ensures that human and productive economic resources can be continuously rechanneled, creating a dynamic environment that strengthens the overall productivity of the economy and supports entrepreneurship.

For corporate persons, two kinds of liquidation process are envisaged under the IBC. Where a CD has committed a “default,” an FC, OC, or the corporate applicant itself can initiate a CIRP of the CD. If the CIRP fails, the CD enters the liquidation phase. Further, a corporate person can choose to voluntarily initiate liquidation proceedings when there is no default—that is, solvent liquidation—under section 59 of the IBC.

In essence, liquidation is a process that is triggered following failure of a procedure for resolution. The IBC mandates that time-bound efforts should be made during the calm (moratorium) period to take stock and, if possible, revive a business—and if the efforts fail, the business should be liquidated, again in a time-bound manner. The objective is to give a potentially viable business a fair chance of revival with the consensus of stakeholders, and proceed to close the business only when its turnaround or rehabilitation is demonstrably unfeasible.

The entire procedure of bringing a lawful end to the life of a company can be divided into the liquidation process (liquidation) followed by the dissolution of the CD. Liquidation is defined as a process by which the life of a company is brought to an end in legal terms, after which it will be properly administered by a liquidator for the benefit of its creditors, members, and other stakeholders. For a corporate entity to cease to exist as a separate legal entity, it must be formally dissolved, at which time it will be struck from the register and will become incapable of owning property in its own name, litigating under contracts, and being sued. The legal status of the corporate entity continues to exist during the period of liquidation, until it is finally and formally dissolved in this manner.