Explains company liquidation in India, including its meaning, reasons, and legal framework under the IBC and Companies Act.
Covers types of liquidation (voluntary and involuntary), asset distribution, and IBC liquidation steps, with 2025 updates from IBBI.
Includes examples, stakeholder impact, and recent reforms to help readers understand procedures, compliance, and dissolution outcomes clearly.
Table of Contents
Liquidation of a company marks the formal closure of its operations and involves settling debts, selling assets, and distributing the proceeds to creditors and shareholders. This process may occur due to financial distress, strategic restructuring, or legal mandates, and understanding it is essential for entrepreneurs and investors in India since it directly impacts stakeholders at multiple levels.
In India, liquidation is primarily governed by the Insolvency and Bankruptcy Code (IBC), 2016, and the Companies Act, 2013. Companies may go through liquidation either voluntarily-when owners decide to shut down operations-or compulsorily, in cases of insolvency or court orders.
For example, in 2023, Go First Airlines filed for insolvency due to financial distress and is currently undergoing a liquidation-related process under the IBC framework. This highlights how liquidation is not just a legal formality but a structured mechanism to protect creditors’ rights and ensure fair settlement.
This article provides a comprehensive overview of liquidation meaning, types, processes, and legal requirements-helping business owners, professionals, and stakeholders make informed decisions when facing or analyzing company closures.
What is Liquidation?
Liquidation is the legal process of closing down a company or partnership. A liquidator is appointed to settle debts, sell assets, and distribute any remaining funds to stakeholders. Once the process is complete, the company is formally dissolved and ceases to exist. The liquidation of a company is formally closed by:
Completing legal and administrative formalities to remove the company from official registries.
Key Reasons for the Liquidation of Company
Here are the key reasons for the liquidation of a company:
Financial Insolvency and Liquidation of Company(LoC): When a company is unable to meet its financial obligations or its liabilities exceed its assets, it may face the LoC as a solution.
Poor Financial Management Leading to Liquidation of Company: Mismanagement of finances, such as improper budgeting, excessive spending, or lack of cash flow management, often leads to the what is liquidation of company due to an inability to recover from financial distress.
Loss of Market Demand and Liquidation of Company: When a company’s products or services lose demand in the market, due to changing trends or technology, it can lead to the LoC, as it becomes unsustainable.
Legal Issues and Lawsuits Leading to Liquidation of Company: A company facing significant legal disputes or regulatory violations may need to liquidate to pay for legal costs, settlements, or penalties, leading to the LoC.
Debt Overload and Liquidation of Company: When a company accumulates unsustainable debt and is unable to pay back creditors, the LoC becomes necessary to settle its debts through asset sales.
Failure to Adapt to Market Changes and Liquidation of Company: Companies that fail to innovate or adapt to changes in market conditions or technology may face decreased profitability and end up with the LoC.
Poor Management or Leadership Leading to Liquidation of Company: Ineffective management or leadership, coupled with poor decision-making, can result in operational failures, pushing a company towards the LoC.
Loss of Key Personnel and Liquidation of Company: If critical personnel or management leave or become unavailable, the inability to run day-to-day operations may result in the LoC.
Internal Conflicts or Shareholder Disagreements Leading to Liquidation of Company: Disagreements among shareholders, directors, or stakeholders can prevent a company from functioning smoothly, leading to the decision for the LoC.
Bankruptcy and Liquidation of Company: Filing for bankruptcy may lead to the LoC selling assets and repaying creditors, as part of the bankruptcy process.
Voluntary Liquidation of Company: Owners or shareholders may choose voluntary LoC due to personal reasons, business direction changes, or a desire to exit the business.
Economic Downturn and Liquidation of Company: A severe economic recession can negatively impact business operations and profitability, leading to a loss as it struggles to survive, even if it had previously been involved in profitable ventures.
Liquidation is a critical process for managing a company’s closure, whether due to insolvency or a voluntary decision by its owners. It ensures that the company’s assets are properly managed, debts are settled, and any remaining value is distributed to shareholders.
Distribution of Assets in Liquidation
The distribution of assets in liquidation refers to the process of settling a company’s debts and distributing any remaining assets to stakeholders when a business is dissolved. This process typically occurs when a company is unable to continue its operations, either due to insolvency or a decision by the owners to cease business activities. Here’s an overview of how assets are distributed during liquidation:
1. Types of Liquidation
Voluntary Liquidation: Initiated by the company’s owners or shareholders when they decide to close the business.
Involuntary Liquidation: Initiated by creditors through a court order when a company is unable to pay its debts.
Types of Liquidation in India
Type
When it Applies
Process Control
Members’ Voluntary Liquidation (MVL)
Company is solvent, can pay debts; often used for planned shutdowns or restructuring
Managed by company directors & shareholders
Creditors’ Voluntary Liquidation (CVL)
Company is insolvent and cannot pay debts; initiated by creditors
Managed by appointed liquidator; overseen by creditors and IBC norms
Voluntary liquidation process 2025 now emphasizes strict compliance under IBC, even for solvent companies, ensuring transparency throughout MVL and CVL proceedings.
2. Liquidation Process in India
Appointment of a Liquidator: A liquidator is appointed to oversee the liquidation process, manage the sale of assets, and ensure that the distribution of assets is conducted fairly and legally.
Asset Valuation: The liquidator assesses and values the company’s assets, which may include cash, inventory, equipment, real estate, and accounts receivable.
3. Order of Distribution
The distribution of assets follows a specific order of priority, which is generally as follows:
Secured Creditors: Creditors who have secured interests in specific assets (e.g., banks with mortgages) are paid first from the proceeds of the sale of those assets.
Unsecured Creditors: After secured creditors are paid, unsecured creditors (e.g., suppliers, contractors) are next in line. They may receive a portion of the remaining assets based on the total amount owed.
Employee Claims: Employees may have claims for unpaid wages, benefits, and severance. These claims are typically prioritized after secured and unsecured creditors.
Shareholders: If there are any remaining assets after all debts and claims have been settled, they are distributed to shareholders. This distribution is usually based on the class of shares held (e.g., common vs. preferred shares).
Residual Assets: If any assets remain after all creditors and shareholders have been paid, they may be distributed according to the company’s articles of incorporation or other governing documents.
4. Legal Considerations
Transparency: The liquidator must maintain transparency throughout the process, providing regular updates to creditors and stakeholders.
Compliance with Laws: The liquidation process must comply with relevant laws and regulations, including those governing bankruptcy and insolvency.
Governing Laws for Liquidation in India
Companies Act, 2013 – Governs voluntary winding up (before IBC was enacted) and certain procedural elements that still apply.
Insolvency and Bankruptcy Code (IBC), 2016 – The primary law now for insolvency and liquidation proceedings.
Companies (Winding Up) Rules, 2020 – Specifies procedures for winding up under the Companies Act.
Securities and Exchange Board of India (SEBI) regulations – In case of listed companies.
Steps in the Liquidation of Securities
Here are the key steps in the Liquidation of Securities:
Step 1- Decision to Liquidate
The investor or institution decides to sell securities due to financial needs, portfolio rebalancing, or market conditions.
Step 2- Valuation of Securities
Current market value is assessed based on stock exchange prices, bond yields, or NAV (in case of mutual funds).
Step 3- Placing the Sell Order
A sell order is placed through a broker, bank, or trading platform for the securities to be liquidated.
Step 4- Execution of Trade
The order is matched and executed on the stock exchange or over-the-counter (OTC) market.
Step 5- Settlement Process
Clearing and settlement take place (T+1 or T+2 cycle in India), transferring securities from seller to buyer and funds to the seller’s account.
Step 6- Payment of Proceeds
Sale proceeds are credited to the seller’s account after deduction of brokerage, taxes, and applicable charges.
Step 7- Compliance & Reporting
Required disclosures, tax filings (like capital gains tax), and accounting entries are made for regulatory compliance.
Latest Liquidation Regulations (IBBI 2025 Update)
The liquidation of company in India has evolved under the IBBI’s 2025 amendments. As per the new regulations:
Liquidators must now submit progress reports every 90 days (earlier 180 days), making the process more transparent.
Timelines for asset sale, distribution, and dissolution have been tightened to ensure faster closure of cases.
The Stakeholders Consultation Committee (SCC) has been given greater decision-making authority during the liquidation period.
To promote accountability, the revised rules mandate digital record-keeping for all liquidation transactions and asset valuations.
Who Can Initiate Liquidation Under IBC 2016?
The Insolvency and Bankruptcy Code (IBC), 2016 empowers different stakeholders to initiate liquidation when a company is unable to pay its debts. Unlike earlier laws, IBC creates a structured framework and gives defined rights to creditors, the company itself, and the adjudicating authority (NCLT). Here’s a detailed breakdown:
1. Corporate Debtor (The Company Itself)
A company can voluntarily initiate liquidation if it realizes it cannot continue operations or meet its debt obligations.
Conditions under IBC:
The company must obtain approval from at least 75% of its shareholders (by value of shareholding).
Directors must file a Declaration of Solvency stating that the company has no pending debts or it can pay off all debts within a specified period.
A special resolution must be passed for voluntary liquidation.
Once approved, the company applies to the NCLT (National Company Law Tribunal) to appoint a liquidator and start the process.
Example: Small private firms often choose voluntary liquidation if business becomes unviable but debts are minimal.
2. Financial Creditors
Who are they?
Banks, NBFCs, financial institutions, and bondholders that provide loans or credit facilities.
Rights under IBC:
If a company defaults on a debt of ₹1 crore or more (threshold under IBC), financial creditors can directly file an application before NCLT.
Once admitted, the Corporate Insolvency Resolution Process (CIRP) begins. If no resolution plan works within the timeline (180–330 days), liquidation is ordered.
Example: In large cases like Lanco Infratech, banks as financial creditors initiated insolvency when the company defaulted on huge loans.
3. Operational Creditors
Who are they?
Vendors, suppliers, service providers, employees, or anyone owed money for operational purposes.
Rights under IBC:
If dues are more than ₹1 lakh (minimum threshold), operational creditors can serve a demand notice to the company.
If the company fails to pay or dispute the claim within 10 days, the operational creditor can file an application with NCLT to start insolvency proceedings.
Operational creditors usually don’t form part of the Committee of Creditors (CoC) but are allowed to present claims during liquidation.
Example: Employees of distressed companies like ABG Shipyard approached NCLT as operational creditors for unpaid salaries.
4. NCLT (National Company Law Tribunal)
NCLT is the adjudicating authority under IBC.
It can order liquidation directly in cases where:
The Corporate Insolvency Resolution Process (CIRP) fails to produce a viable resolution plan within 330 days.
The Committee of Creditors (CoC) itself votes (66% majority) in favor of liquidation during CIRP.
A resolution plan is rejected because it doesn’t comply with IBC requirements.
Once liquidation is ordered, the Resolution Professional (RP) is usually appointed as the liquidator.
Example: In the Reliance Naval case, NCLT ordered liquidation after creditors failed to reach a workable resolution plan.
IBC Liquidation Steps
To simplify, here are the core IBC liquidation steps as per current law:
Board Resolution / Special Resolution A formal resolution is passed by the company’s board or shareholders to initiate the liquidation of company in India.
Appointment of Liquidator An insolvency professional is appointed, and intimation is made to ROC and the IBBI.
Public Announcement of Liquidation The liquidator issues a public notice inviting all creditors to submit their claims within a specified time.
Verification of Claims The liquidator verifies all claims to determine the debt and liabilities owed by the company.
Formation of Stakeholders’ Consultative Committee (if required) This group assists in corporate decisions during the liquidation process.
Asset Sale & Distribution (Waterfall Mechanism) Assets are sold, and the proceeds are distributed in order of IBC priority:
Insolvency process costs
Secured creditors
Unsecured creditors
Operational creditors
Employees & other stakeholders
Application for Dissolution Once distribution is complete, the liquidator files the final report and seeks a dissolution order from the NCLT.
Example of Liquidation
Example 1: Compulsory Liquidation
A manufacturing company, XYZ Ltd., is unable to pay its debts due to financial losses. Creditors file a petition in court, and the court orders the company’s liquidation. A liquidator is appointed to sell its machinery, buildings, and inventory. The proceeds are used to pay secured creditors, employees, and other liabilities. After all payments, the company is officially dissolved.
Example 2: Voluntary Liquidation
ABC Pvt. Ltd. is a profitable company, but its owners have decided to retire and close the business. They initiate a Members’ Voluntary Liquidation (MVL) and appoint a liquidator to sell the company’s assets. After paying off all liabilities, the remaining funds are distributed among shareholders before the company is formally shut down.
Role & Duties of Directors Before Liquidation
Declaration of Solvency (for Voluntary Liquidation)
Submit a Declaration of Solvency confirming the company can pay its debts within the specified period.
Include details of assets, liabilities, and financial health.
Ensure a full inquiry into the company’s affairs before making the declaration.
Cooperation with the Liquidator
Hand over books, accounts, and records of the company.
Provide complete information on transactions, assets, and liabilities.
Respond promptly to any queries from the liquidator.
Restriction on Disposal of Assets
Cannot sell, transfer, or dispose of any company assets once liquidation begins.
Any unauthorized disposal may lead to legal consequences.
Fiduciary Duties and Accountability
Act in good faith and in the best interest of creditors and shareholders.
Avoid concealment or misrepresentation of company assets.
Directors can face fines or imprisonment under the Companies Act 2013 and IBC 2016 for non-compliance.
Communication with Stakeholders
Ensure creditors, employees, and shareholders are informed about the liquidation process.
Facilitate smooth claim settlement and avoid disputes.
Impact of Liquidation on Various Stakeholders
Stakeholder
Impact
Employees
Job loss, pending salary payments handled by liquidator.
Creditors
Paid according to legal order of priority.
Shareholders
May receive leftover funds after creditor repayment.
Business Partners
Existing contracts and agreements are terminated.
Does Liquidation Lead to Dissolution of a Company?
This is the legal termination of a company’s existence. After the liquidation process is complete and all debts and obligations have been settled, the company is formally dissolved. Dissolution marks the end of the company’s legal existence, and it is no longer allowed to conduct business.
After liquidation, the company is dissolved approximately three months later.
The dissolution process involves removing the company from the Companies House register, which signifies the end of its legal existence.
So, while liquidation involves the process of settling the company’s affairs and selling off its assets, dissolution is the final step that legally ends the company’s existence. In most cases, liquidation leads to dissolution, but there are scenarios where a company might be dissolved without going through a full liquidation process, such as through a merger or acquisition.
Conclusion
The liquidation of company in India is a difficult but necessary step for struggling businesses. Whether it’s a voluntary liquidation process 2025 or compulsory closure, following the correct IBC liquidation steps ensures legal compliance and fair asset distribution. With expert advice and smart planning, liquidation can be handled smoothly and even open the door to a fresh start.
Liquidation of a company is the legal process of closing its operations, selling assets to repay creditors, and distributing any remaining funds to shareholders. It usually occurs when the company is insolvent or unable to continue business.
What are the 3 types of liquidation of company?
The 3 types of liquidation of company are: 1. Voluntary Liquidation: Initiated by the company’s directors or shareholders. 2. Compulsory Liquidation: Ordered by a court, often due to creditor petitions. 3. Members’ Voluntary Liquidation (MVL): A type of voluntary liquidation suitable for solvent companies.
What does liquidation mean for a company?
When you liquidate a company, its assets are used to pay off its debts. Any money left goes to shareholders.
Is the liquidation of company good or bad?
Liquidation of company can be good for creditors, as it may be a way to recover some of their money, but for employees and shareholders, it’s often negative, as it means the business is shutting down. Ultimately, it signals financial failure or insolvency.
Who is paid first in the liquidation of company?
In liquidation, creditors are paid in a specific order. Secured creditors (those with collateral) are paid first, followed by unsecured creditors (like suppliers and employees). After these, shareholders receive any remaining funds, though they often get nothing if debts exceed assets.
Who pays the liquidator?
The liquidator’s fees are typically paid from the assets of the company being liquidated. The liquidator is responsible for managing the liquidation process, and their compensation comes from the proceeds of the asset sales. This payment is prioritized before any distributions to creditors or shareholders.
Who selects the liquidator?
The liquidator is typically selected by the company’s directors in the case of voluntary liquidation or appointed by the court in involuntary liquidation initiated by creditors. The chosen liquidator is usually a licensed insolvency professional responsible for managing the liquidation process.
What is the process of liquidation?
The company liquidation process involves closing a business by selling its assets to pay off debts and distributing any remaining funds to shareholders. It typically includes appointing a liquidator, settling liabilities, and legally dissolving the company. Liquidation can be voluntary (initiated by the company) or compulsory (ordered by the court due to insolvency).
What is liquidation called?
Liquidation is the process of closing a business and distributing its assets to creditors and shareholders. It typically occurs when a company is insolvent or ceases operations. The assets are sold, and the proceeds are used to repay debts before dissolving the company.
What is the time limit for liquidation?
The time limit for liquidation varies based on the type and complexity of the process. In voluntary liquidation, it can take a few months to a couple of years. In compulsory liquidation, it may take several years, depending on asset disposal and debt settlements. Legal and regulatory requirements also impact the timeline.
What is the difference between winding up and liquidation?
Winding up is the overall process of ending a company’s operations, while liquidation is a specific step within that process, involving the sale of assets to pay off debts. In simpler terms, winding up is the broad term for closing a company, and liquidation is the method used to settle the company’s financial obligations during that process.
Authored by, Samiksha Samra Digital Content Writer
Samiksha is a writer with a passion for sharing ideas and a knack for detail. She loves turning concepts into meaningful, engaging content. With a strong background in research and content strategy, she crafts clear, easy-to-understand narratives that resonate with readers. Her curiosity drives her to explore new subjects, ensuring every piece she creates is both insightful and impactful.
