Winding Up of a Company

Saumya Garg, a 3rd-Year BBA LL.B student of UPES, Dehradun has written this article explaining”Winding Up of a Company”

INTRODUCTION

The winding up of a company is a legal procedure in which the firm’s assets are liquidated and the revenues are used to pay off creditors and distribute any residual money to shareholders. In India, the Companies Act, of 2013, provides for the dissolution of a business. Moreover, it is important to note that the Companies Act, 2013 prescribes two ways to wind up a company. Firstly, there is the voluntary winding up, where the members or shareholders of the company decided to wind it up voluntarily. Secondly, the court orders the compulsory winding up of the company.

In the case of voluntary winding up, the company needs to pass a special resolution to that effect and appoint a liquidator who will take care of the winding-up process. Also, the liquidator will then take charge of the company’s assets and liabilities and distribute them amongst the shareholders.

On the other hand, in the case of compulsory winding up, the court may pass an order to wind up the company on the basis of several grounds specified under the Companies Act, 2013. These include instances where the company is unable to pay its debts, where it has acted against the interests of the sovereignty and integrity of India, or where it has been carrying on business with fraudulent intent.

The process begins with the appointment of a liquidator, who administers and distributes the company’s assets among its creditors and shareholders. To prevent the danger of insolvency, companies ought to handle their statutory commitments carefully. Under the Companies Act, of 2013, there are two ways to dissolve a company[1].

COMPULSORY WINDING UP:

When a firm fails to pay its debts, a court order is issued. The firm itself, any creditor, or any contributing can submit a petition for winding up.

VOLUNTARY WINDING UP:

This is often done by the firm’s shareholders if they consider the company to be no longer viable or profitable. Members or creditors can voluntarily dissolve a corporation.

VOLUNTARY WINDING UP

The process by which a company decides to wind up its operations and dissolve itself is known as voluntary winding up. When the firm’s shareholders or directors believe the business is no longer viable or that its objectives have been met, they commence this procedure. Members’ voluntary winding up and creditors’ voluntary winding up are both examples of voluntary winding up.

In a members’ voluntary winding up, the firm is solvent, and the shareholders think it can pay off its obligations in full within 12 months of the winding up’s initiation. A special resolution is passed by the shareholders to wind up the firm. Moreover, a liquidator is appointed to oversee the process. The liquidator is in charge of collecting and selling the company’s assets, paying off its obligations, and distributing any excess to the shareholders.

In a creditors’ voluntary winding up, the firm is also solvent, but the shareholders feel it will be unable to repay its obligations in full within the time frame specified. In this instance, the directors convene a meeting of the company’s creditors and approve a specific resolution. A liquidator is appointed to oversee the winding-up process, and the company’s assets are liquidated to pay off its creditors. Any excess is divided among the stockholders.

Because it does not entail judicial action, voluntary winding up is a less difficult and less expensive procedure than forced winding up. However, in order for voluntarily winding up to be considered, the firm must be able to pay off its obligations in full, and the owners and directors should act in good faith to defend the best interests of every stakeholder. Voluntary winding up is further categorized into two types:

Members’ voluntarily winding up:

This is begun when the firm is solvent and the shareholders think that the company’s purpose or objectives have been met. The shareholders vote to dissolve the firm and appoint a liquidator to liquidate the assets and divide the money among the shareholders.

Creditors’ voluntary winding up:

This is done when the firm is bankrupt and the shareholders feel it will be unable to continue operating. The creditors appoint a liquidator to liquidate the assets and divide the money among them. A liquidator might also be appointed by the shareholders to manage the process[2].

COMPULSORY WINDING UP

The court initiates the compulsory winding-up procedure after receiving a petition from the corporation, creditors, or any other interested parties. Incapacity to pay debts, public interest, just and equitable, default in statutory responsibilities, oppression and mismanagement, criminal actions, and decline in membership is the most typical reasons for forcible winding up. Companies must comply with their statutory requirements and manage their operations in a fair, transparent, and in the best interests of all shareholders to prevent being forced to wind up. The following actions can result in compulsory winding up:

The company itself:

If a firm thinks it cannot continue to function, it can submit a petition for winding up.

Creditor:

A petition for winding up can be filed by one or more creditors who owe more than Rs. 1 lakh.

Contributory:

A contributory is a person who is obligated to contribute to the company’s assets in the case of its liquidation. A contributing may submit a petition for dissolution.

Central Government:

If the Central Government feels that the corporation is not operating in the public interest, it may submit a petition for winding up[3].

GROUNDS FOR COMPULSORY WINDING UP:

Inability to pay debts:

If a firm is unable to pay its debts, it may be forced to liquidate. The inability to pay debts might result from a lack of assets, a lack of liquidity, or insolvency.

Public interest:

In the public interest, the court may order the dissolution of a corporation. This might happen if the firm is involved in unlawful actions, fraudulent practices, or damage to the public.

Fair and equitable:

If it is just and equitable, the court may order the dissolution of a corporation. This might occur if there is a standoff among the directors, shareholders, or management, or if the company’s operations are being managed in a way that is detrimental to the interests of part of the shareholders.

Noncompliance with statutory responsibilities:

A firm may be forced to liquidate if it fails to meet its statutory obligations. Failure to file yearly returns, failure to have annual general meetings, or failing to keep adequate books of accounts are examples of such violations.

Oppression and mismanagement:

A court may order the dissolution of a business if its affairs are being managed in an oppressive or detrimental way to the interests of certain of its shareholders. This can happen if the management is working in their own self-interest or if the company’s affairs are mismanaged.

Illegal actions:

A firm may be forced to liquidate if it is involved in illegal activities such as money laundering, terrorist funding, or any other illegal activity.

Membership reduction:

A company may be forced to dissolve if its membership falls below the statutory minimum necessary for the creation of a business[4].

PROCEDURE FOR WINDING UP A COMPANY

Under the Companies Act of 2013, the following is the method for winding up a company:

Board resolution:

The firm’s board of directors must approve a resolution to dissolve the company.

Special resolution:

To wind up the corporation, the shareholders must vote for a special resolution.

Appointment of a liquidator:

A liquidator is appointed to supervise the company’s dissolution. A chartered accountant, company secretary, or any other professional designated by the Central Government may act as liquidator.

Notification to Registrar:

Within 30 days after passing the resolution, the firm shall notify the Registrar of Companies.

Declaration of solvency:

In the event of a member’s voluntary winding up, the directors must submit a declaration of solvency declaring that they have made an examination into the company’s operations and think that the firm can pay its obligations in full within three years.

Statement of affairs:

The directors must also draught a statement of affairs outlining the company’s assets and liabilities.

Creditors’ meeting:

This meeting is convened to nominate a liquidator and to approve the statement of affairs.

Asset sale:

The liquidator must sell the company’s assets and divide the money between creditors and shareholders in accordance with their individual entitlements.

Liabilities must be settled:

The liquidator must satisfy all of the company’s liabilities, including taxes and government dues.

Final accounts:

The liquidator must produce and provide a final account of the winding up to the shareholders and creditors.

Company dissolution:

Once all assets have been sold and liabilities have been resolved, the business must be liquidated. The liquidator must file an application with the Registrar of Companies to dissolve the firm.

Order for dissolution:

The Registrar of Companies may issue an order for the company’s dissolution after determining that all of the conditions of the Companies Act, 2013 have been met[5].

CONSEQUENCES OF WINDING UP ORDER

When a court issues a winding-up order, it has numerous ramifications for the corporation, its shareholders, and its creditors. Some of the most serious effects of a winding-up order are as follows:

Business operations must be terminated

After the winding-up order is issued, the firm must halt all business operations. The liquidator will seize the company’s assets and liabilities and begin the process of winding up the business.

Appointment of liquidator

A liquidator will be appointed by the court to manage the winding-up process. The liquidator will be in charge of the company’s assets and obligations, as well as dispersing the profits of asset sales to the company’s creditors.

Asset sale

The liquidator will sell the company’s assets and divide the money among the creditors based on their individual rights. After paying the company’s debts, any excess will be allocated to the shareholders.

Restriction on company activities

After a winding-up order is issued, the business’s rights are limited. Without the consent of the liquidator or the court, the firm will be unable to dispose of any of its assets, initiate or defend any legal procedures, or carry on any commercial operations.

Payment Priority

The company’s creditors will be paid in the order of priority. Secured creditors have precedence over unsecured creditors, whereas preferential creditors take precedence over both secured and unsecured creditors. The stockholders will only get any residual proceeds once all of the company’s debts have been paid.

Dissolution of the firm

Once the liquidator has concluded the winding-up procedure, the company will be dissolved. The Companies Registry will remove the name of the firm, and it will cease to exist as a legal entity.

Personal responsibility of directors

If the company’s directors are found to have breached their fiduciary obligations, they may be held personally accountable for any debts incurred by the business during their term as directors[6].

WINDING UP UNDER IBC, 2016

The Insolvency and Bankruptcy Code (IBC) 2016 is a comprehensive piece of law that establishes a time-bound and efficient framework for dealing with insolvency in India. The IBC has superseded previous insolvency and bankruptcy laws and intends to consolidate and update the laws governing the reorganization and insolvency resolution of corporate entities, partnership businesses, and individuals in a timely way.

The IBC has a procedure called winding up, where the assets of the corporate debtor are sold to pay off its creditors. The procedure of winding up under the IBC differs from the process of dissolving a corporation that is no longer viable under the Companies Act, 2013[7].

Types of Winding Up Under IBC

The goal is to finish the procedure in 180 days, extendable up to 270 days if needed.

Additionally, the IBC permits financial creditors or the corporate debtor itself to initiate the insolvency resolution process. This provision has empowered corporate debtors and enabled them to take control of the resolution process. Additionally, the IBC has created a separate class of creditors known as operational creditors, who are typically suppliers and service providers. The IBC provides for the inclusion of operational creditors in the CoC, thereby giving them a say in the resolution process.

CONCLUSION

Finally, under the Companies Act of 2013, winding up a business is a legal procedure that is launched when a firm is no longer able to pay its obligations or when it is regarded to be in the public interest to do so. Inability to pay debts, failure to meet statutory requirements, oppression and mismanagement, and illicit acts are all grounds for forcible winding up. When a winding-up order is issued, it appoints a liquidator to take charge of the company’s assets and obligations, and the firm must halt all activities.

The company’s obligations will be paid down using the proceeds from asset sales in the order of priority, with any surplus allocated to shareholders. Once the liquidator has finished the winding-up procedure, the firm will be dissolved. Companies must comply with their statutory requirements and manage their operations in a fair, transparent, and in the best interests of all shareholders to avoid being forced to wind up.

To Know about the different types of Companies: Click Here

[1] https://www.ijllr.com/post/comparative-analysis-of-winding-up-of-a-com-pany-perspectives-in-uk-usa-india

[2] Patwari, Sumita, Voluntary Winding Up in India – A Comparative Analysis (January 10, 2014). Available at SSRN: https://ssrn.com/abstract=2377165 or http://dx.doi.org/10.2139/ssrn.2377165

[3] Joanna Womack. (1975). Company. Winding up on the Just and Equitable Ground. Stay of Winding-Up Order. The Cambridge Law Journal, 34(2), 209–212. http://www.jstor.org/stable/4505852

[4] Ibid.

[5] Arjunan, K. (1996). “LOCUS STANDI” OF DIRECTORS TO PETITION FOR COMPANIES WINDING UP. Singapore Journal of Legal Studies, 111–135. http://www.jstor.org/stable/24866844

[6] https://www.taxmann.com/post/blog/259/winding-up-of-a-company/

[7] Ibid.