Introduction:
Liquidation is the process through which a company’s assets are sold off, and its operations are wound up. A company may be wound up voluntarily, by a court, or under court supervision. Voluntary liquidation, as the name suggests, occurs when a company decides to wind up its affairs willingly and in a controlled manner. A voluntary winding up includes the members of the company or its creditors. In Bangladesh, voluntary liquidation is governed by the Companies Act, 1994. Let’s take a closer look at the process of voluntary liquidation for companies in Bangladesh.
Types of Voluntary Liquidation:
Under the Companies Act of 1994, there are two types of voluntary liquidation:
- Members’ Voluntary Liquidation (MVL): This type of voluntary liquidation is initiated when the directors and shareholders of a solvent company decide to wind up the business voluntarily. In an MVL, the company’s directors must make a declaration of solvency stating that the company can pay off its debts within a specific period not exceeding 12(twelve) months from the commencement of the winding-up. MVL is a formal strategy to close a solvent company. The company needs to pay off all its debts and ensure all tax filings are correct in order for the members to proceed with voluntary liquidation.
- Creditors’ Voluntary Liquidation (CVL): In contrast, a creditors’ voluntary liquidation is chosen when the company is insolvent, meaning it is unable to meet its financial obligations. In this case, the directors will convene a meeting with the company’s creditors and propose the liquidation. A liquidator is appointed, and the company’s assets are sold to repay the creditors.
Official Liquidator:
Sections 255-266 deal with the appointment of the official liquidator under the Companies Act 1994
Section 255 – Appointment of official liquidator, Section 256 – Resignations, removals, filling up vacancies and compensation, Section 258 – Statement of affairs to be made to the liquidator, section 259 – Statement by liquidator, section 260- Custody of company’s property, Section 261- Committee of Inspection in compulsory winding up, Section 262 – Powers of official liquidator, section 263- Limit of Discretion of official liquidator, 264- Provision for legal assistance to official liquidator, 265- Liquidator to keep books containing proceeding of meetings and to submit account of his receipts to Court and section 266 – Exercise and control of liquidator’s powers.
It is pertinent to note that on the appointment of the liquidator, all the powers of the directors shall cease except so far as the committee of inspection, or if there is no such committee, the creditors sanction the continuance thereof.
Fixing the liquidator’s remuneration
Section 305(1) of the Companies Act of 1994 states that the committee of inspection or the creditors shall determine the liquidator’s remuneration.
Process of Voluntary Liquidation:
The process of voluntary liquidation involves several steps, regardless of whether it is an MVL or a CVL:
- Board Resolution: The company’s directors must propose voluntary liquidation and convene a board meeting to resolve the issue. In the case of an MVL, a declaration of solvency must also be made.
- Shareholders’ Meeting: In both MVL and CVL, a shareholders’ meeting must be convened to pass a special resolution approving the voluntary liquidation. For an MVL, the shareholders must also approve the declaration of solvency.
- Appointment of Liquidator: A liquidator must be appointed to oversee the liquidation process and distribute the company’s assets among creditors and shareholders. The liquidator can be an individual or a licensed insolvency practitioner.
- Notice to the Registrar: After the appointment of the liquidator, a notice of voluntary liquidation must be filed with the Registrar of Joint Stock Companies and Firms (RJSC) within 14 days.
- Notice to Creditors: The liquidator must publish a notice of voluntary liquidation in two daily newspapers, inviting creditors to submit their claims within a specified period.
- Realization of Assets: The liquidator’s primary responsibility is to identify and sell the company’s assets. The proceeds are then used to repay creditors in the case of a CVL and distributed to shareholders after settling all liabilities in an MVL.
- Final Meeting: Once the liquidation process is complete, the liquidator must call a final meeting of the company’s shareholders or creditors (depending on the type of liquidation) to present the final accounts and explain how the liquidation was conducted.
- Dissolution: After the final meeting, the liquidator must file the necessary documents with the RJSC, and the company is officially dissolved.
Key Highlights
- In a voluntary liquidation, a company is liquidated by selling its assets and paying off any outstanding debts.
- A Members Voluntary Liquidation (MVL) is a requirement for all solvent companies; additionally, every insolvent company has to go through a CVL (Creditors Voluntary Liquidation).
- The company is obligated to be able to pay off its debt within a year.
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Conclusion
Voluntary liquidation provides a legal and orderly means for companies in Bangladesh to wind up their operations either when they are solvent, and the shareholders wish to discontinue the business (MVL) or when they are insolvent and unable to pay their debts (CVL). The process is subject to strict legal procedures to ensure fair treatment of creditors and shareholders. It is essential for companies considering voluntary liquidation to seek professional advice to navigate the process smoothly and fulfill their legal obligations.
