Running an organization isn’t easy! You should always understand the risks and rewards it comes along with. Especially when you’re the owner of a joint-venture or partnership firm, you need to be prepared with every plan of action, even when it’s time to shut down operations and close down the firm. 

But, what is this term called? And, what about my assets in the business? Well, we understand the concern involved around ‘liquidation’ and the different factors involved in the process. Therefore, to help you understand better, let’s walk you through the term, process, and steps involved in the liquidation of a firm. But first, let’s understand the term closely! 

What is Liquidation?

Liquidation refers to the process of winding up a company as an entity. While the decision may be voluntary or involuntary, the term signifies that an organization is ready to divest its assets. For instance, the responsible board behind running a retail chain might want to shut down some of its stores.

What Follows The Liquidation Of A Firm?

When a company or an organization decides to wind up its operations, it uses its assets to clear out the dues of creditors. In such a process, the company’s name continues to stay live on the Companies House. Still, there are no further operations, and it goes under asset liquidation until it completely dissolves. 

Liquidation Under Different Sections of Companies Act

  • As per the Companies Act, Section 2(94A) of 2013, “winding up” refers to putting an end to operations under the Bankruptcy and Insolvency Code, 2016.
  • As per the Companies Act, Section 270 of 2013, a company can only call liquidation in either of the two ways. They are: 
    • By the Tribunal
    • Voluntary.
  • Bankruptcy and Insolvency Bankruptcy Code of Section 56, 2016, claims that a company that has not committed any default can voluntarily pass a special resolution to wound operations.

Steps Involved in the Liquidation Process?

The Liquidation process includes multiple steps, they are: 

Step 1: An Insolvency Practitioner needs to be appointed as the Liquidator.

Step 2: In the next step, powers are retained from the directors’ and IP takes over the operations of the company and its other affairs.

Step 3: The third step calls in for assessing and realizing the company’s assets.

Step 4: Once the realization is done, creditors are paid their part of the share on priority.

Step 5: The surplus cash left after the settlement is distributed to the shareholders.

Once all the steps are followed, we can say that the company is officially dissolved and removed from the registrar of companies in weeks.

Taxation Aspects of Liquidation

You might come across taxation issues while you’re liquidating your company. It is a common scenario in several circumstances. Generally, the transfer or sale of the assets held by a company results in a taxable gain. Over such scenarios, the liquidator needs to pay the necessary income tax before distributing the profits among shareholders.

Listed below are some of the tax implications which a liquidator needs to consider before closing their company:

– GST treatment

– Implication on Capital Gains Tax (including the deemed market value)

– Time of Other tax payments and liabilities.

Failing to account for any of the suggested factors might lead to severe legal constraints on a liquidator. In such instances, the liquidator might become liable for tax debts while reimbursing the assets and distributing the proceeds.

Duties of a Liquidator

The Liquidator of a firm needs to align its accounts with proper book-keeping. Further, they also need to keep a statement of the receipts and payments made. The primary aim of precise bookkeeping is to demonstrate precise accounting of the realized profits acquired by the sale of the assets. 

Further, liquidators might also face taxation issues while distributing the profits among the shareholders. Depending on the nature of the distribution, there might be different tax requirements as well. 

Now You Know!

Liquidation isn’t easy! You need to be prepared with all the required documentation and proof to ensure a seamless transaction. It should also be understood that the process requires proper accounting and taxation. Remember, liquidation, when aligned with rightful methods, can be a seamless process.