There are three main types of liquidation: solvent, insolvent, and forced. The different modes of liquidation are as follows:
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Solvent Liquidation: This type of liquidation is used by a solvent company to close down following the distribution of funds to shareholders.
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Insolvent Liquidation: This type of liquidation is used by insolvent companies that are unable to pay their debts. There are two procedures for insolvent companies: Creditors Voluntary Liquidation (CVL) and compulsory liquidation.
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Creditors Voluntary Liquidation (CVL): This is a voluntary process initiated by the companys directors or shareholders. The companys assets are sold off, and the proceeds are used to pay off creditors. If there are any remaining assets, they may be distributed to the shareholders.
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Compulsory Liquidation: This is a legal process initiated by the creditors of a company. It happens when the company cannot pay its debts and cannot agree on a repayment plan with its creditors. In such cases, the creditors can apply with the National Company Law Tribunal (NCLT) and request the company’s dissolution. The NCLT will then appoint a liquidator who will take over the companys assets and sell them off to pay the creditors.
- Forced Liquidation: This type of liquidation is not voluntary and is initiated by external factors such as a court order or government intervention.
In summary, the modes of liquidation are determined by the financial status of the company and the decision-making power of its directors and shareholders.
