Date added: : 15.10.2015

Liquidation of a legal entity is a method of termination of its activities in the absence of continuity in its rights and obligations with the subsequent exclusion of such an enterprise from the unified state register of legal entities, as well as its removal from tax accounting.

Since the rights and obligations of a legal entity do not transfer to legal successors, the task of securing the rights and interests of creditors becomes even more important here than in cases of its reorganization. Therefore, the law in different countries establishes its own special procedure for the liquidation of a legal entity.

The liquidation may be carried out voluntarily, upon the decision of the founders or an authorized body of the legal entity, in particular, after the expiration of the term or with the achievement of the purposes for which it was created (for example, the management of the enterprise under construction ceases to operate after the commissioning of the ready facility).

Compulsory liquidation in accordance with the court decision is also possible. The grounds for it are the implementation by a legal entity of its activities without a proper permission (license) or with repeated or gross violation of the law or other legal acts, as well as the contradiction of this activity with legislative prohibitions (including the systematic violation of its special legal capacity by a non-profit organization).

A special case of liquidation of a legal entity is its bankruptcy.

Bankruptcy is understood as the documented inability of the business entity to pay its debt obligations and finance the current core business due to lack of funds.

Liquidation of a legal entity is a rather lengthy procedure, the main content of which is to identify and satisfy the creditors' claims. At the same time, a legal entity continues its activities (until its removal from the state register).

Each of the types of liquidation (by decision of the founders, by a court decision or in case of bankruptcy) has its own characteristics and clearly defined order by law.

Below there is the procedure for the voluntary liquidation of a legal entity in India, as well as the requirements for the procedure of dismissal of the employees of an enterprise in the event of its liquidation.

The procedure of voluntary liquidation of a legal entity in India:

Step 1: It is necessary to hold a meeting of the Board, at which:

a) make sure that the company can fully pay its debts for three years from the start of the liquidation procedure;

b) sign a solvency application in which it is necessary to indicate the list of assets and liabilities, as evidenced by the oath taken by the Directors before the Judicial Magistrate. The application shall be accompanied by:

- a verified Balance Sheet and a Statement of Income and Expenses, starting from the date of the end of the last audit and compilation of the latest Income and Expense Report and ending with the last business date of the company preceding the filing date of the Liquidation Application;

- statement of assets and liabilities of the company as of the date of the meeting;

- a copy of the act of the company's auditors in respect of the two above-mentioned documents;

c) approve at the meeting the draft resolution for voluntary liquidation by decision of the shareholders and for appointing a liquidator with the establishment of a remuneration, as well as for setting the date, time and place of the general meeting.

Step 2: Submit copies of the solvency application to the Registrar no later than 5 weeks before the date of the General Meeting of Shareholders.

Step 3: Draw up a notice to the General Meeting of Shareholders offering a special resolution with an appropriate explanatory note.

Step 4: Hold a general meeting and approve the Special Resolution on Liquidation.

The liquidation procedure begins with the approval of the resolution.

Step 5: Within 10 days of the adoption of the resolution, submit a notification to the Register of Organizations for the appointment of the liquidator after payment of the required fee.

Step 6: Provide the liquidator with a report on the obligations of the company (in tw copies), duly certified under oath, within 21 days of the commencement of the liquidation.

Step 7: Submission of the Special Resolution approved for the liquidation procedure, together with the explanatory note, to the Register of Organizations within 30 days from the date of its adoption with payment of the required fee.

Step 8: Within 14 days of the adoption of the resolution on voluntary liquidation, announce the adoption of such resolution in the Official Gazette, as well as in several newspapers that are printed in both English and Tamil, in the area where the legal address of the company is located.

Step 9: Similar to the procedure specified in Step 8, the Liquidator must publish a notice of its appointment in the Official Gazette, and also notify the registrar of its appointment.

Step 10: Similar to the procedure specified in Step 8, the Liquidator notifies the Inspector of the enterprise profit tax according to Section 178 of the Law on Enterprise Profit Tax of 1961. There is no strict form for this action. It will be enough to write letter in free form.

Step 11: If the liquidator finds that the company can not pay its debts fully within the period specified in the solvency application or if the period indicated in the solvency application has expired and the debts have not been fully paid off, the liquidator must organize a meeting of creditors and compile a statement of assets and liabilities of the company before the meeting.

Step 12: After the expiration of 1 year from the start of the liquidation process, and also within 3 months after the end of each year from the commencement of the liquidation procedure, the Liquidator must convene the General Meeting and draw up, prior to the meeting, a report on the actions taken by him.

Step 13: In case of applying the actions set out in Step 11, the Liquidator must convene a meeting of creditors also within 3 months after the end of the year.

Step 14: The liquidator must submit an application to the appropriate Registrar of Companies in accordance with the established procedure together with the audit report in accordance with the established procedure twice a year, in case the liquidation is not completed after one year from the moment of its initiation.

Step 15: Completion of the liquidation through the sale of its assets and the repayment of all remaining obligations, the return of the share capital, if present.

Step 16: After liquidation, the liquidator conducts his audit.

Step 17: The liquidator convenes a meeting of creditors by written notification.

Step 18: The meeting provides information on the affairs and assets of the company collected in Step 16.

Step 19: A special resolution on the destruction of other company documents is also made at the meeting, if the company's affairs and deals are liquidated and are not subject to further consideration.

Step 20: Within a week after the final meeting of creditors (Step 17), the liquidator and the state registrar are given a declaration about the company's available property and income.

Step 21: Submit a special resolution to the state registrar within 30 days after payment of the necessary fees.

Step 22: The company's registrar, having received payment and information about the property of the company, registers the relevant data.

Step 23: The liquidator, after receiving data on the property, income and financial documents of the company, decides whether this procedure does harm the employees of the company or other citizens, and reports this to the court. With the notification of the court, the company is considered liquidated.

The procedure for dismissal of employees in case of liquidation

With regard to the procedure for the dismissal of employees, the company is obliged to pay mandatory payments to employees, such as wages, severance payments, and so on. In case of such reduction, the employer is obliged to notify the employees working more than a year, in advance for one month, and also to notify the corresponding state body (sec. 25F of the ID Act).

Special provisions apply to industrial enterprises with 100 or more employees - notification must be made 3 months before and the appropriate permission of the state body should be obtained (sec. 25N, IDA). Employees with more than one year of service are also eligible for severance payments equivalent to 15 days for each year of work (sec. 25F (b), IDA). In addition, employees working for more than 5 years are entitled to compensation, in accordance with the Payment of Gratuity Act, 1972.

If you are interested in initiating a liquidation procedure in relation to your business, please contact the lawyers of Law&Trust International. Our experts will provide you with qualified advice on liquidating enterprises in any jurisdiction that you are interested in, and also provide legal support for the entire procedure for the liquidation of the enterprise on a turn-key basis. Applying for help to the specialists of Law&Trust International, you will get quality services at the best prices!