Company Law

Winding Up of Company

Major authorities under the Companies Act 2013

INTRODUCTION

“There is a two-fold solemnity which belongs to the dying hour-it is the winding up of life, and it is the commencement of eternity.”   ~Frederick William Robertson

Winding up of a company is the process whereby the company’s life comes to an end and its assets are administered for the benefit of its creditors and members. An administrator, called liquidator is appointed and he takes control of the company assets pays debts and finally distributes any surplus among the members in accordance their respective rights.[1]

In the words of Pennington winding up is the procedure by which the affairs and management of company’s assets are taken from the directors, its properties are managed by a liquidator, and its debts and liabilities are discharged out of the proceeds of realisation and any surplus of assets remaining is returned to its members or shareholders. At the end of the winding up the Company it will have no assets or liabilities, and it will take the formal step of dissolution.

Winding up of a company can be due to a number of reasons such as hardship, bankruptcy etc. The winding up of a company can be initiated intentionally by the shareholders or creditors or by a Tribunal. The court on hearing the winding up application can either expel it or to make an interim request as it thinks suitable. It may even appoint a liquidator for the company till the application has been passed.

Winding up order may be given by the court with or without cost. Thus, it a mechanism whereby the assets of the company are utilised for the advantage of its shareholders and creditors. The person who manages the entire assets of the company when it is in winding up position is called as called Liquidator. With the enactment of the Insolvency and Bankruptcy Code, 2016, it has become difficult to apply provisions simultaneously and to decide precedence. The IBC has also included a lot of amendments to the Act. The Code provides a constructive framework for companies.[2]

With the passing of the Insolvency and Bankruptcy Code, there are now two modes of winding up; either under the Companies Act of 2013 or the IBC Code of 2016. Under Section 2(94A) winding up under this Act, i.e. the Companies Act or the Insolvency and Bankruptcy Code, 2016. This paper seek to address about the winding up of the company with its reason and types winding up of the company. Even it tried to explain about the role of the court while doing winding up of the company.

WHAT IS WINDING UP?[3]

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. In words of Professor Gower, “Winding up of a company is the process whereby its life is ended and its Property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

According to Halsburry’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about & in the course of which its assets are collected and realised; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.” Winding up is a leg.

REASONS FOR WINDING UP OF A COMPANY

  • The company’s objective for its establishment has been fulfilled.
  • The company is incapable to carry business.
  • Death of promoters.
  • Bankruptcy.
  • The company is unable to pay its creditors.
  • The company disposes of its business to another company or an individual.

Difference between Winding up and dissolution

Generally, the term “winding up” and “dissolution” used to mean the same thing, but accordingly to companies Act, these two terms are quite different by their legal procedures. The difference between them are as below:

Points Winding Up Dissolution
Main Feature The first stage and involves realising of assets, paying off liabilities and distribution of surplus if any.The second stage in which a company is finally dissolved.
ProceedingsCarried out by the liquidator appoint by the company/ courtOrder can be issued only by the court.
Liquidator’s duties Liquidators represents the companyLiquidator cannot represent company
DebtCreditors can prove their debtsCreditors can’t prove their debts

WINDING UP OF COMPANY UNDER COMPANY’S ACT, 2013[5]

Prior to the Insolvency and Bankruptcy Code, there were two forms of winding up, first being the voluntary winding up from sections 304 to 323 of Companies Act and the second being winding up by the tribunal. The first has been deleted with the passing of the code and presently, compulsory winding up, i.e. winding up but tribunal is the existing method under the 2013 Act.

Under the process, the life of the company is ended & its property is administered for the benefits of the members & creditors. A liquidator is appointed to realise the assets & properties of the company. After payments of the debts, is any surplus of assets is left out they will be distributed among the members according to their rights. Winding up does not necessarily mean that the company is insolvent. A perfectly solvent company may be wound up by the approval of members in a general meeting.[6]

There are differences between winding up and dissolution. At the end of winding up, the company will have no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the company takes place. On dissolution, the company’s name is struck off the register of the companies and its legal personality as a corporation comes to an end.

WINDING UP A REGISTERED COMPANY AND AN UNREGISTERED COMPANY

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. An administrator, called the liquidator, is appointed and he takes control of the company, collects its assets, pays debts and finally distributes any surplus among the members in accordance with their rights. At the end of winding up, the company will have no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the company takes place. On dissolution, the company’s name is struck off the register of the companies and its legal personality as a corporation comes to an end.

The procedure for winding up differs depending upon whether the company is registered or unregistered. A company formed by registration under the Companies Act, 1956 is known as a registered company. It also includes an existing company, which had been formed and registered under any of the earlier Companies Acts.

In Pierce Leslie & Co. Ltd v. Violet Ouchterlony,[7] the Hon’ble supreme court held that winding up precedes the dissolution. There ‘is no statutory provision vesting the properties of a dissolved company in a trustee or having the effect of abrogating; the law of escheat. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company, its properties, if any, vest in the government.

MODES OF THE WINDING UP A COMPANY

Modes of winding Up
By the court Compulsory winding up (sec. 433 – 483)
Voluntary Winding Up(sec. 484 – 531)
Winding Up under the Supervision of the court (sec. 522 – 527)
1) VOLUNTARY WINDING UP[8]

To give a brief idea, it is a process where the company becomes insolvent and so it decides to wind-up the company before the NCLT does and declares itself to be insolvent. There are two ways by which the company declares voluntary winding-up:

  1. By Ordinary Resolution: A company may wound up voluntarily if the given period or duration of the company has expired. Such period should be mentioned in the articles of the company or if there is any mentioning in the articles, that company shall dissolve on the occurrence of a particular event and if such event occurs then the company, by passing an ordinary resolution can start the process of winding-up.
  2. By Special Resolution: A company may wound up voluntarily after getting 75% majority from its shareholders and board of directors. The process will only start when the special resolution has been passed. After the resolution has passed the same has to be published in the Official Gazette and in leading newspapers of that district/city within 14 days.
DECLARATION OF INSOLVENCY

This declaration is done by the majority of directors at a meeting and the same has to be verified by an affidavit. The following declarations shall be made:

  • They have to declare that a full inquiry in the debts of the company has been made and that they will be able to pay their debts in full by selling the assets or that they have no debts.
  • Such a declaration has to be made within 5 weeks before the date of the resolution and has to be informed to the registrar of the company for registration before that date.
  • It shall also declare that the winding-up of the company is not with the intention to defraud any person.
  • It shall declare the time period within which they will clear their debts (if any).
  • If the debts will be paid off by selling off assets, a valuation report of the assets shall be attached. Valuation of such assets shall be prepared by a registered valuer.
  • If the company fails to pay its debt within the time specified, it will be considered that there was no reasonable ground for making the declaration.
  • The liquidator can then call for a meeting of creditors.
MEETING OF CREDITORS[9]

Creditors of the company are also notified through the post and a meeting is conducted for them where they are handed with a list which consists of the amount due for each creditor. The board of directors will put the statement of affair and the declaration of solvency in front of the creditors. If the majority of the creditors are of the opinion that voluntary winding-up should be followed, the company will then be wound up voluntarily. But, if they are of opinion that it is in the best interest of the company that NCLT/ Tribunal should wind up the company because it will not be able to clear its debt then the process of winding up will be followed by sending an application to tribunal within 14 days and within 10 days the same has to be informed to the registrar of the company.

A liquidator is then appointed by the company keeping in mind the rules & regulations laid down by Insolvency & bankruptcy code. The liquidator is then required to evaluate the asset & liabilities of the company and present a final report to NCLT.

2) COMPULSORY GROUND (BY COURT I.E. NCLT)

  • Inability to pay debts (this has been shifted to Insolvency & Bankruptcy code 2016)
  • Failure to pay demand: If a company is holding loan of more than 1lakh and creditor sends notice to pay the amount then in such a case, a formal notice has to be given by the creditor. If within 21 days of such notice, the company is not able to pay or doesn’t reply or doesn’t deposit the security, neither it is trying to restructure the debt then it is known as failure to pay demand.
  • Decreed Debt: Failure to do the execution of the court’s demand. It means the court has given the order to pay and there is a failure of obeying of the court’s order, can also be known as contempt of court/violation of court’s order/ failure of satisfaction of the decree/ company is not able to satisfy the decree of the court.
  • Commercial Insolvency: Auditors feel that there is increase in liability and, assets are not increasing. Therefore, they feel that the company is becoming detrimental to the interest of the public. The financial structure is such that liability is increasing and assets are not increasing. There is a likelihood of the happening of the event of insolvency. At this point the company is not insolvent but before such event happen company thinks to declare insolvency so that they can pay the shareholder, creditors/ pay their taxes & etc.

B. Special Resolution Resolved: 75% of majority shareholders pass the resolution for winding up of the company but execution takes place by NCLT/discretion of NCLT to govern the winding up.

C. When the company acts against the interest of sovereignty of India & integrity of India, friendly relation with the foreign state, decency, morality, public, security of the state.

D. Affairs of the company are conducted in a fraudulent manner.

  1. Formed for unlawful purposes.
  2. Management guilty of fraud.

E. Company has failed to file the return with the registrar of the company for 5 consecutive years.

F. When NCLT thinks it’s just and equitable to wind up the company.

  1. Deadlock: when there is a deadlock between partner and it can’t be resolved court will pass the order for compulsory winding up.
  2. Loss of Substratum: It means the substance of the object clause is no more valid. The business that the company wants to do is either banned or the government doesn’t give permission.
  3. Losses & losses
  4. Oppression & Management
  5. Public Interest

An application to wind up a company compulsorily may be filed by:

  • The company itself;
  • Any director of the company;
  • A creditor of the company;
  • A contributory;
  • A liquidator of the company;
  • A judicial manager of the company;
  • Where the company is carrying on or carried on banking business, the Monetary Authority of Singapore; or
  • Various Ministers on grounds specified under the law.

PETITION FOR WINDING UP OF COMPANY

According to Section 272 by the Companies Act, 2013 the following individuals have the authority to file for a compulsory winding up procedure under Companies Act.

Company as Petitioner (272(a)):

The Company may present a petition for Compulsory Winding Up if a special resolution has been passed to that effect.[10]

Contributory or contributories as Petitioners (272(b)):

A contributory shall be entitled to present the petition only if the shares were originally allotted to him; or he has held his shares for at least 6 months during the 18 months immediately preceding the commencement of winding up; or the shares have been devolved on him by reason of the death of a member. A contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares; or the company may have no assets at all; or the company may have no surplus assets left for distribution among the shareholders after the payment of its liabilities.

Registrar (272(d)):

The Registrar is allowed to present a petition for winding up only on the following grounds;

1. Company acting against the security of the country etc.

2. Where the affairs of the company have been conducted fraudulently

3. Non-filing of financial statements or annual returns by the company

The Registrar shall obtain the previous approval of the Central Government before making a petition for winding up. Further, the Central Government shall not grant the approval to the Registrar unless the company has been given a reasonable opportunity of making representations.

The Central Government or a State Government (272 (e) and (f)):

Any person authorised by the central government or, if the petition is made on the ground that the company has acted against the interests of the sovereignty and integrity of India; or the security of the State; or friendly relations with foreign States; or public order; or decency; or morality.[11]

A copy of every petition made to the Tribunal for winding up of a company shall also be filed with the Registrar. Within 60 days of receipt of petition, the Registrar shall submit his views to the Tribunal. Every petition shall be filed according to Form No. NCLT. 1. Other attachments are to be accompanied in Form No. NCLT. 2. The verification of the same has to be done according to an affidavit under Form No. NCLT. 6.

POWER OF THE COURT TO DISPOSE OF PETITION OF WINDING UP[12]

On hearing a petition for the winding up of the company, the court may take the following steps;

  1. 1.It may dismiss the application with or without costs.
  2. 2.It may adjourn the hearing conditionally/unconditionally.
  3. 3.It may dispose of the application in any way it thinks fit.
  4. 4.It may make an interim order.
  5. 5.It may order the winding up of the company with or without coats or make any other orders as it thinks fit.

POWER OF THE COURT AFTER WINDING UP ORDER

• To give stay order on receipt of the application for stay order either from auditor or contributor or from the official liquidator

• Directs the contributors who hold partly paid shares to pay the balance on such shares in case of inadequate funds to meet the liabilities & expenses

• Can order dissolution of company when it finds that:

  • it is difficult for the liquidator to proceed with winding up for wants of funds.
    • (ii) the affairs of the company are completely wound up.

• The court has the power to exclude those creditors who fails to prove claims within the stipulated period for the benefit of any distribution to be made on behalf of the company

MAIN EFFECTS OF A COMPULSORY WINDING UP ORDER[13]

  • When a company is wound up compulsorily by the Court, the winding up is deemed to have commenced at the time of the making of the application for the winding up. Within 14 days of the winding up order, the directors and the secretary of the company must deliver a statement of the company’s affairs to the liquidator, who must then file a copy of the statement with the Court. The statement of affairs contains, amongst others, details of the company’s assets and liabilities and other information required by the Official Receiver or the liquidator and enables the liquidator to carry out investigations into the affairs of the company.
  • After the winding up application is filed, the company, its creditors or its shareholders may apply to restrain any pending proceedings against the company. Once the winding up order is made, no action against the company may be commenced or continued without the leave of the court. Any disposition of the company’s property and any transfer of its shares after the commencement of winding up shall be void unless the Court orders otherwise.
  • The Court Fees payable for the filing of documents in respect of Compulsory Winding Up Proceedings may be found in the Second Schedule of the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020.

PROCEDURE FOR THE WINDING UP (Section 274 to Section 365)

It is essential to understand a stepwise procedure of winding up under the Act. The procedure laid down under the statute is as follows:

  1. The Tribunal may direct the Company to be wound up, if it is satisfied that a prima facie case exists. The Tribunal further directs the Company to file its objections along with a statement of its affairs within 30 days of such order (this timeline may be extended under special circumstances).
  2. Further, the Tribunal at the time of passing an order shall also appoint a provisional liquidator or company liquidator. The Liquidator on its appointment shall file a declaration within seven days from the date of appointment in the prescribed form, disclosing a conflict of interest or lack of independence in respect to his appointment.
  3. If the Tribunal has passed an order of winding up, then the directors and such other officers have to submit the completed and audited books of the Company mandatorily, within 30 days of such order to the provisional Liquidator. If the director or such other officers fails to submit the required audited books, then they shall be personally liable for fine and imprisonment for contravening the provisions of the Act.
  4. The Tribunal within 7 days of passing an order for appointment of provisional Liquidator shall intimate the same to the Liquidator and the Registrar. On receipt of the copy of order, the Registrar shall endorse the same and notify about the order in the Official Gazette. In case of a listed company, the Registrar shall intimate about the order to the stock exchange or exchanges where the securities of the Company are listed.
  5. The winding-up order shall be deemed to be a notice of discharge to the officers, employees, and workmen of the Company, except when the business of the Company is continued.
  6. Within 3 weeks from the date of passing of winding up order, the company liquidator shall make an application to the Tribunal for the constitution of a winding-up committee to assist and monitor the progress of liquidation. Such committee would comprise of the Liquidator, the nominee of secured creditors, and a professional nominated by the Tribunal.
  7. When the order of winding-up is passed, no suit or other legal proceedings shall be commenced, or is pending, shall be proceeded with, by or against the Company, except with the leave of the Tribunal.
  8. On passing the order of winding up, the Tribunal shall pass an order to set up an advisory committee to assist the Liquidator and report the Tribunal regarding the matters as the Tribunal may direct. The committee should not exceed more than 12 members which is headed by the company liquidator and consisting of creditors and contributories of the Company, or other persons in such proportion as the Tribunal may direct.
  9. The Liquidator has to submit a report to the Tribunal within 60 days of passing of the order of winding up. The report should be an exhaustive one, consisting of nature and details of the assets, valuation of the assets, amount of capital issued, existing and contingent liabilities, etc. The Liquidator shall also make a report on the steps to be taken for maximizing the value of the assets. The Liquidator should place periodical reports before the Tribunal to update about the Company’s progress from time to time.
  10. The Tribunal, after scrutinizing the report by the Liquidator, shall fix a time within which the entire proceedings shall be completed, and the Company is to be dissolved, or the Tribunal may on examination of the report order sale of the Company as a going concern or its assets or part thereof. Accordingly, to assist the Liquidator in the sale, a sale committee is set up comprising of creditors, promoters, and officers of the Company.
  11. Thereafter, the company liquidator on the order of winding up shall take into custody and control all the property, effects and actionable claims to which the Company is or appears to be entitled. The property shall be deemed to be in the custody of the Tribunal from the date of order of winding up.
  12. The Liquidator is under mandatory obligation to present the Tribunal with account of receipts and payments of the Company, which will be audited and copy of such audit report should be filed with the Tribunal, and other copies be delivered to the Registrar, which shall be open to inspection by any creditor, contributory or person interested.
  13. The Tribunal then, orders the contributories to pay any money due to the Company from him. If any money is due from the Company towards the contributory and the contributory has not paid in full share amount, is allowed set off. Further, the Tribunal may issue summons to those, who are suspected of having Company’s property and examine such persons. Apart from this, if any other person has some property of the Company, a report of the same has to be filed by the Liquidator.
  14. The company liquidator has the power to call the creditors to prove their claims, upon which the Liquidator prepares a list of creditors. Each creditor is then communicated about their claims being accepted or rejected. The Liquidator also ensures that every invoice, order or business letter issued by or on behalf of the Company, should contain a statement that Company is being wound up.
  15. After all the formalities are over, the affairs of the Company has been completely wound up, the Liquidator shall submit an application to the Tribunal for dissolving the Company. If the Tribunal after the receipt of the application is of the opinion that it is just and reasonable to dissolve the Company, an order of dissolution is passed. A copy of such order shall be forwarded by the Liquidator to the Registrar.

VOLUNTARY VS. WINDING UP UNDER SUPERVISION OF THE COURT

Voluntary winding upWinding up under supervision of the court
The members’ and creditors may appoint the liquidatorsThe court may appoint an additional liquidator and also remove him
Transfer of share or alteration of status of members is possible only after liquidator’s sanctionIn this transfer or alteration is not valid so the liquidator cannot sanction it.
Attachment of the company property or sale of property does not require court’s permissionIn this case it requires permission of court
If any member or officer makes fraud against the company, the liquidators report the matter to the Registrar.The prosecution of the fraudulent officers and members of the company may take by the court.

Advantages of Supervision of the Court

There are some advantages of winding up of a company under Supervision of the Court, they are as follows:

  1. It automatically operates as stay of suits and other proceedings against the company.
  2. An additional liquidator may appoint by court.
  3. The power of the liquidator may restrict by court.
  4. The company cannot be dissolved without the order of the court.

CONCLUSION

The process of winding-up of a company is not very simple, it includes within it many complexities and technicalities. Earlier there was just the Companies Act, 2013, which governed this area, however with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide precedence. However, the process of compulsory winding up under the Company Act, 2013 a favourable framework for companies for winding up.

It can be further concluded that NCLT plays an important role in the winding-up of a company. It takes all measures to protect the interest of the creditors, debenture holders and gives a conclusive guideline so that the process of winding-up can be followed smoothly & effectively and at the same time has made an effort to be extremely transparent and easy.

BIBLIOGRAPHY

https://indiankanoon.org/doc/51057115/

http://mca.gov.in/SearchableActs/Section336.htm

https://www.lexology.com/library/detail.aspx?g=88950cdd-4eaf-4a32-b09c-332c67255739

https://www.supremecourt.gov.sg/rules/court-processes/civil-proceedings/other-civil-proceedings-and-processes/company-wnding-up-proceedings

http://www.legalservicesindia.com/article/1319/Winding-Up-of-a-Compay.html#:~:text=It%20is%20the%20mode%20of,process%20of%20voluntary%20winding%20up.

https://lawtimesjournal.in/widing-up-of-comany-under-compny-law/


[1] Ipleader, winding up of a company, available at: https://blog.ipleaders.in/winding-up-of-a-company/ (visited on April 10, 2021).

[2] Lawtimesjournal, Winding up of Company under Company Law, available at: http://lawtimesjournal.in/winding-up-of-company-under-company-law/#_edn11 (visited on April 10, 2021).

[3] CRO, Court winding up, available at: https://www.cro.ie/Termination-Restoration/Company/Winding-Up/Court (visited on April 14, 2021).

[4] Legal Services India, Winding Up of a Company, available at: http://www.legalservicesindia.com/article/1319/Winding-Up-of-a-Company.html (visited on April 14, 2021).

[5] Mondaq, winding up of company: a statutory glace, available at: https://www.mondaq.com/india/corporate-and-company-law/938456/winding-up-of-company-a-statutory-glance-part-1 (visited on April 14, 2021).

[6] Mondaq, winding up of company: a statutory glace, available at: https://www.mondaq.com/india/corporate-and-company-law/938456/winding-up-of-company-a-statutory-glance-part-1 (visited on April 14, 2021).

[7] 1969 SCR (3) 203

[8] Role of Courts in Winding-up of Company, available at: https://lexpeeps.in/role-of-courts-in-winding-up-of-company/#:~:text=To%20constitute%20Committees%20of%20Creditors,control%20assets%20of%20corporate%20debtors. (visited on April 15, 2021).

[9] Role of Courts in Winding-up of Company, available at: https://lexpeeps.in/role-of-courts-in-winding-up-of-company/#:~:text=To%20constitute%20Committees%20of%20Creditors,control%20assets%20of%20corporate%20debtors. (visited on April 15, 2021).

[10] Re Orissa Trunks & Enamel Works Ltd. (1973) 43 Comp. Cas. 503

[11] Companies Act, 2013;An Analysis of Winding up under the IBC, 2016

[12] Supreme court, COMPANY WINDING UP PROCEEDINGS, available at: https://www.supremecourt.gov.sg/rules/court-processes/civil-proceedings/other-civil-proceedings-and-processes/company-winding-up-proceedings (visited on Aoril 15, 2021)

[13] Supreme court, COMPANY WINDING UP PROCEEDINGS, available at: https://www.supremecourt.gov.sg/rules/court-processes/civil-proceedings/other-civil-proceedings-and-processes/company-winding-up-proceedings (visited on Aoril 15, 2021)

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