Company Winding Up Process Explained
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Daisy VergheseCompany Winding Up Process Explained
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Daisy VergheseModule VI
Winding up
Introduction
The process of ending the life of a company by administering its properties for the
benefit of shareholders & creditors of the company is known as winding up of a
company. Winding up essentially is a process of liquidating the assets of a corporation,
firm, or other legal entity which is followed by subsequent payment to its creditors and
distribution and issuance of assets to its partners or shareholders upon dissolution.
Generally,windingupisdonewhenitisorderedbythetribunalorwhenitisdecidedbythe
creditors or members. There are many reasons forwindingupbyacompanyorbusiness
i.e., insolvency or bankruptcy, death of promoters, or mutual agreement among
stakeholders.
Winding up is a process in which the company is dissolved by clearing all the debts or
liabilities,dissolutionofitsassetsiscollected,andotherimportantitemsarereturnedtothe
creditors and if any contributions are made by the members, they are also returned.
Therefore, winding up we can say isaprocessofputtinganendtothelifeofacompany.
Subsequent to ending up, the disintegration cycle happens. The disintegration of an
organization is recorded by the enlistment center of organizations.
“According to Section 2(94A) of the Companies Act, 2013 or Insolvency and Bankruptcy
Code, 2016, “Winding up” means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016, as applicable.” Chapter XX Sections 270–378 of
the Companies Act, 2013 deals with winding up and other aspects of it.
Definition:
InthewordsofProfessorGower,"Windingupofacompanyistheprocesswherebyitslifeisended
anditsPropertyisadministeredforthebenefitofitsmembers&creditors.AnAdministrator,calleda
liquidator, is appointedandhetakescontrolofthecompany,collectsitsassets,paysitsdebtsand
finally distributes any surplus among the members in accordance with their rights."
According to Halsbury’sLawsofEngland,“Windingupisaproceedingbymeansofwhich
the dissolution of a company is brought about & in the course of which its assets are
collected and realised; and applied in payment of itsdebts;andwhenthesearesatisfied,
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.”
Whenacompanyistobeclosed,aproperprocedurehastobefollowed.Thisprocess
of realization of assets, payment to creditors and distribution of surplus among the
shareholders in ordertofinallydissolvethecompanyiscalledwindingup.Thus,itcan
be said that winding up isthelaststageafterwhichacompanyceasestoexistandis
finally dissolved.
Evolution of provisions of winding up of a company
IntheBritishEra,thecompanylawwasintroducedbytheJointStockCompanyAct,
1850. This Act was based on the English Companies Act, 1844. ThisActlaiddown
the procedure for the incorporation of a company for the first time. It also recognised
companies ashavingseparatelegalentities,buttheconceptoflimitedliabilitywasnot
added. This concept was introduced in Indiain1857.In1858,thisconceptwasmade
applicable to banking companies as well. In1866,aconsolidatedCompaniesActwas
enacted which provided provisions for incorporation, regulation and winding up of the
companies. This Act was further amended in 1882 in order to make the Act in
conformity with the English Companies Act, 1862.
Further,theActwasreplacedbytheCompaniesAct,1913passedinaccordancewith
theEnglishCompaniesConsolidationAct,1908.ThisActwasamendedextensively
in 1936 due to the enactment of a new English law. Finally, a committee was set up
under the Chairmanship of Shri H.C. Bhaba for the revision of company law in the
country. The committee recommended enacting a new legislation. Thus, Companies
Act1956wasenactedandimplemented.ThisActwasalsoamendedseveraltimestill
1991whenthegovernmenttriedtorecasttheAct.However,thebillwaswithdrawn,and
certain amendments were made in the existing Act. The Companies (Second
Amendment) Act, 2002 is important for provisions related to winding up of the
companies.Itprovidesforaspeedywinding-upprocessandfacilitatestherehabilitation
ofsickcompanies.ItalsoestablishedtheNationalCompanyLawTribunalinthisregard.
The Companies Act 1956 was finally replaced by the Companies Act, 2013 which is
morerationalizedandsimplified.TheActalsointroducedcorporatesocialresponsibility,
fixed terms for independent directors etc. Another major development in the field of
Company Law was the implementation of the Insolvency and Bankruptcy Code,2016
whichomittedtheprovisionsforvoluntarywindingupintheCompaniesAct,2013.The
provisions of voluntary winding are now dealt with under the IBC Code.
Modes of winding up of a company
AccordingtoSection270oftheAct,acompanycanbewoundupbyeitherofthetwo
modes. These are:
I. Winding up by the Tribunal ( NCLT)/ Compulsory winding-up
II. Voluntary winding up of a company
ChapterXXoftheCompaniesAct,2013dealswiththewindingupofacompany.PartI
providesforwindingupbythetribunal,whilePartIIprovidesprovisionsforthevoluntary
winding up of a company. However, Part II has been omitted by the Insolvency and
Bankruptcy Code, 2016.
Winding up by court/tribunal
Chapter XX of the Companies Act, 2013 in part I deals with the winding up of a
companybyacourtortribunal.Whenacompanyiswoundupbytheorderofacourtor
tribunal,itiscalledwindingupbythecourtortribunal.Thismodeofwindingupisalso
calledcompulsorywindingupofacompany.Theprovisionswithrespecttothesame
are explained below.
Who can file a petition for the winding up of a company
According to Section 272 of the Companies Act, 2013, the following persons can
present a petition for the winding up of a company to the Tribunal:
I. Company: According to Section 272(1)(a), a petition for winding up can be
presented by a company itself. However, before presenting a petition, the
company must passaspecialresolutioninthisregard.Apetitionforwindingup
ofacompanyshallbepresentedinFormWIN1orFormWIN2,asthecasemay
be, with such variations as the circumstances may require, and shall be
presented in triplicate. From WIN 1 is filed by anyone other thanthecompany,
whereas WIN 2 is used when the winding up is filed by the company itself.
In the case of BOC India Ltd. ZincProducts&Co.(P)Ltd.(1996),apetition
forwindingupwaspresentedbyapersonnotauthorizedtodosobytheboardof
directors and hence, the petition was declared as incompetent.
II. Any contributory: According to Section 2(26) of the Act, a contributory is a
person who is liable to contribute towards assets of the company in case it is
wound up. However,accordingtoSection272(2),acontributorywillbeallowed
to present a petition for winding in spiteofhimbeingtheholderoffullypaidup
shares or the company has no surplus assets left for distribution among its
shareholders after satisfying all the liabilities. Oneimportantrequirementisthat
the shares in respect of which a person is a contributory were allotted or
registeredunderhimforatleast6monthsduringtheperiodof18monthsbefore
thecommencementofwindinguporsuchsharesdevolvedonhimbythedeath
of the former holder.
III. All or any personsmentionedabove: Thepetitionforwindingupcanalso
be presented by the company and the contributories together or separately.
IV. Registrar: The registrar can file a petition for the winding up of a company
under the following circumstances:
● Actions of the Company were against the interests of sovereignty and
integrity of the country, Security of States, friendly relations, morality etc.
● If the tribunal is of the opinion that the company was formed with a
fraudulentaimandunlawfulpurposeoritsaffairshavebeenconductedin
afraudulentmannerorthepersonswhoformedthecompanyareguiltyof
fraud or misconduct.
● There was a default in filingthefinancialstatementsorannualreturnsof
the company with the Registrar.
The registrar is required to obtain previous sanction from the Central
Governmentbeforefilingapetition.Thegovernmentwillnotaccordthesanction
unless the company is given a reasonable opportunity to make the
representations.
However, a registrar cannot file a petition for winding up of a company to a
tribunal, if a company has decided that it will be wound up by a tribunal by a
special resolution. Moreover, a petition presented by a companyforwindingup
will be admitted by the tribunal only if it is accompanied by a statement of affairs.
V. Person authorized by central government: Section 272(1)(e) provides
thatapetitionforwindingupcanalsobefiledbyanypersonwhoisauthorizedby
the Central Government to do so.
VI. Central or State government: The Central or State government can also
present a petition for winding up of a company if its actions are against the
sovereignty and integrity of the country, public order, morality, decency, foreign
relations etc.
Grounds for winding up by tribunal:
Section271dealswithcircumstancesunderwhichatribunalcanorderforwindingupof
a company. These are:
● Ifthecompanyisunabletopayitsdebts:Thecompanywillbeconsidered
unable to pay its debts in the following scenario[Section 271 (2)]:
(a) If a creditor, to whom the company owes an amount exceeding one
lakh rupees, has served a formal notice for payment at the company’s
registered office, and the company fails to remit the owed sum within
twenty-one days of receiving such demand, or does not provide
adequatesecurityornegotiateasatisfactoryrestructuringorsettlementof
the debt.
(b) if any execution orotherprocessissuedonadecreeororderofany
court or tribunal in favor of a creditor of the company is returned
unsatisfied in whole or in part; or
(c)IfitisdemonstratedtothesatisfactionoftheTribunalthatthecompany
isunabletopayitsdebts,theTribunalshallconsiderbothcontingentand
prospective liabilities of the company in its assessment.
● Specialresolution:AccordingtoSection271(a),apetitionforthewinding
upofacompanycanbepreventedifaspecialresolutionhasbeenpassed
by the company in this regard.
● Sovereignty, integrity,andotherfactors:Acompanycanbewoundby
a tribunal if it acts against the sovereignty and integrity of India, the
security of the state, foreign relations, public order, morality etc. This is
given under Section 271(b) of the Act.
● Fraudulentconductofthecompany:AccordingtoSection271(c),ifthe
tribunal on the application filed by the registrar is of the opinion that the
company was formed with a fraudulent aim and unlawful purpose or its
affairs have been conducted in a fraudulent manner or the persons who
formed the company are guilty of fraud or misconduct, it can order for
winding up of the company.
● Default in filing financial statements or audit returns: Section271(d)
provides thatwherethecompanydefaultsinfilingitsfinancialstatements
or audit returns withtheregistrar,thetribunalcanorderforwindingupof
the company.
● Justandequitable:Atribunalcanorderforwindingupofacompanyifit
is just and equitable to do so in the following circumstances:
● Deadlock: When two or more people cannot agree with each otherand
reach an agreement, the situation is known as deadlock. In case of
deadlock between the management of the company, it is just and
equitable for the tribunal towindupthecompany.InthecaseofEtisalat
Mauritius Ltd. V. Etisalat DB Telecom (P) Ltd. (2013), there was a
deadlock and irretrievable breakdownbetweenmajorshareholdersofthe
company which further hampered its performance and work and no
scheme or solutioncouldbepropounded,thetribunalorderedtowindup
the company.
● Loss of Substratum: When the object of the company fails, it leads to
loss of substratum. In the case of Dunlop India Ltd. re (2013), the
company was unable to show its long or short term business plans and
the companywasnotconductingitsbusinessforquitesometimeandso
the company was ordered to wind up. InthecaseofSethMohanLalv.
GrainChambersLtd.(1968),theSupremeCourtobservedthatwhenthe
objectofthecompanyforwhichitwasformedfailssubstantially,itleadsto
loss of substratum.
● Losses:ifacompanyissufferinglossandcannotcarryonitsbusiness,it
is just and equitable to wind up the company. A company was asked to
winduponthisgroundinthecaseofBachharajFactoriesv.HirjeeMills
Ltd. (1955).
● Oppressionofminority:anotherjustandequitablegroundforatribunal
to order winding upiswheretheprincipalshareholdersadoptaggressive
or oppressive policies towards the minority shareholders.
● Fraudulent purpose: a tribunal can also order for winding up of a
company if it has been formed for an unlawful or illegal purpose.
● Public interest: if itisinthepublicinteresttowindupacompany,itisa
just and equitable ground. In the case of Millennium Advanced
TechnologyLtd.,re,(2004),thecompanywasorderedtowindupdueto
multiple undesirable practices like false invoicing etc.
● Company was a bubble: When the company was a bubble, i.e. it was
neverinrealbusiness,thenalsoitclassifiesasjustanequitablegroundof
winding up.
Steps for compulsory winding up or winding up by a tribunal
The Companies (Winding Up) Rules, 2020 providestherulesgoverningcompulsory
winding up process of a company along with required formsandparticulars.This,the
steps involved in the process are:
Step 1- the petition forwindingupmustbepresentedinFormWIN1orFormWIN2.
The petition must be verified by an affidavit by a person making the petition or if the
petition is made by the company by its director, secretary or any other authorized
person. The affidavit must be in accordance with Form WIN 3.
Step 2- the statement of affairs has to be filed within 30 days in accordance with
Section 274 of the Companies Act, 2013. It must contain the information till the date
when the statement is filed. The statement must be filed in Form WIN 4 and
accompanied by an affidavit of concurrence of the statement.
Step3-thepetitionwillbepostedbeforethetribunalandadatewillbefixedforhearing
the petitioners. If the petition is not made by the company, notice will be sent to the
companyandanopportunitytobeheardmustbegivenbeforeadvertisementdirections
to be given with respect to the petition.
Step4-accordingtoRule6,everycontributorieswillbeservedacopyofthepetitionby
the person making the petition within 24 hours of making payment in this regard.
Step5- noticeofthepetitionwillbegiveninadvertisement14daysbeforefixingadate
ofhearinginadailynewspaperwhichiswidelycirculatedinthestatewheretheofficeof
registrar is located. The newspaper must be either in English or any vernacular
languageofsucharea.Further,rule8providesthatanapplicationforwindingupcannot
be withdrawn without the permission of the tribunal
Step6- Anyobjectioncanbefiledintheformofanaffidavitinobjectionwithin30days
from the date of order and the same will be served to the petitioner.
Step7- Thereplytotheobjectionmustbefiledintheformofanaffidavitwithin7days
before the date fixed for hearing of petition.
Step 8- provisional liquidator will be appointed after the admission of petition by the
tribunal and upon sufficient grounds for his appointment in accordance with Rule 14.
The order of appointment of provisional liquidator will also contain restrictions and
limitations on his powers. The same will also be intimatedtotheprovisionalliquidator
and the registrar of companies within 7 days from the date of order of appointment.
Step9- orderofwindingupbythetribunalwillbeinaccordancewithFormWIN11and
will be sent by the registrar to the company liquidatorwithin7daysandthesamewill
also be advertised.
Step 10- According to Section 281, when the tribunal has made an order for the
winding up of a company or appointed a liquidator in this regard, he will withinsixty
days,submit a report to the tribunal
Step 11- Section 282 oftheActdealswiththedirectionsofthetribunalonthereport
submitted by the company liquidator and provides that on the basis of the report
submittedbytheliquidator,atimelimitwillbefixedbythetribunaltocompletetheentire
proceedings and can revise the same. It will also order for sale of the company as a
going concern or its assets on examination of the report and can also appoint a sale
committee consisting of creditors,promoters,andofficersofthecompanytoassistthe
companyliquidatorinthesale.Ifthereportdisclosesthatfraudhasbeencommittedin
the company, thetribunalwillorderforinvestigationordirectthecompanyliquidatorto
fileacriminalcomplaint.Thetribunalwillalsotakenecessarystepstoprotect,preserve
or enhance the value of the assets of the company.
Step 12- After the affairs of the company have wound up completely, the company
liquidatorwillapplyforthedissolutionofthecompanywithin10daysalongwithaudited
final accounts and auditors certificates and the tribunal will order for dissolution. The
process of winding up will be concluded on the day on which the order ofdissolution
has been reported to the registrar of the company.
Appointment of advisory committee
According to Section 287, the tribunal can direct the appointment of an advisory
committee in order to advise the company liquidator. The committee will consist of a
maximum of 12 members. The company liquidatorwillconveneameetingofcreditors
andcontributorieswithinthirtydaysfromthedateorderorwindinguphasbeenpassed
by the tribunal in order to determine the member of the committee.
The committee has been empowered to inspect the books of accounts and other
documents along with assets and properties of the company under liquidation. The
Section provides that the committee will bechairedbythecompanyliquidatorandthe
provisions related to convening of meetings, the procedure to be followed in the
meetings and conduct of the business of the committee will be prescribed accordingly.
Submission of reports by the liquidator
AccordingtoSection281,whenthetribunalhasmadeanorderforthewindingupofa
company or appointed a liquidator in this regard, he will within sixty days, submit a
report to the tribunal containing the following particulars:
● Natureanddetailsofassetsofthecompanywhichincludestheirvalueandalso
statethecashbalanceseparately.However,thevaluationmustbeobtainedfrom
the registered valuers.
● Amount of capital issued, paid up and subscribed.
● Existing and contingent liabilities of the company which include names,
addresses, and occupations of the creditors. The amount of secured and
unsecured debts must also be stated separately.Forsecureddebts,particulars
of securities and their value and dates on which they were given must alsobe
provided.
● All debts due to the company along with the necessary details like names,
addresses and occupations of persons to whom they are due along with the
amount.
● Guarantees extended by the company.
● List of contributories and dues to be paid by them and details of unpaid calls.
● Details of trademarks and intellectual properties owned by a company.
● Legal cases filed by or against the company and their details.
● Any other information which the tribunal or company liquidator considers
necessary.
The manner in which the company was promoted or formed and whether there has
been any fraud by any officer of the company must be included in the report. He will
also make a report on the viability of the business of the company or steps for
maximizingthevalueofassetsofacompany.AccordingtoSection281(4),acompany
liquidator can also make further reports. Further subsection 5 provides that a person
who describes himself as a creditor or contributory can inspect the report submitted
under the Section and take copies or extracts.
Consequences of winding up
AccordingtoSection278oftheAct,theorderofwindingupwilloperateinfavourofall
creditors and contributories as if it has been made on theirjointpetition.Section279
further provides that no suit or any other legal proceeding can be initiated against a
company against whom an order of winding up has been passed without any
permission from the tribunal, against whom the orderofwindinguphasbeenpassed.
An application in this regard will be decided within 60 days.
Powers of tribunal with respect to winding up of a company
According to Section 273, the tribunal can passthefollowingorderswithrespecttoa
petition filed for winding of a company:
● Dismiss the petition with or without costs;
● Any interim order;
● Appointment of provisional liquidator till the order of winding up is made;
● Order of winding up of a company either with or without costs;
● Any other order.
Any such order must be passed within ninety days from the date the petition is
presentedinthetribunal.TheSectionalsoprovidesthatbeforeappointingaprovisional
liquidator, the tribunal will give a notice andreasonableopportunitytothecompanyto
maketherepresentations.Itfurtherprovidesthatifapetitionispresentedontheground
thatitisjustandequitableforthecompanytowindup,thetribunalcanrefusetoorder
forwindingupifanyotherremedyforthesameisavailableandthepetitionersarenot
acting reasonably.
According to Section 274, when a petition for winding up is made, the tribunal is
satisfiedifthecasecanorderthecompanytofileitsobjectionsalongwithitsstatement
ofaffairswithin30days.Thetribunalcanalsodirectthepetitionertodepositsecurityfor
costsasapreconditiontotheissuanceofdirectionstothecompany.Ifacompanyfails
to file the statement of affairs, its right to oppose the petition will be forfeited andthe
directorsandofficersofthecompanywhoarefoundresponsibleforthenon-compliance
will be liable for punishment. If any director or officerofthecompanycontravenesthe
provisions of this Section, he will be punished with imprisonment extending up to six
months or a fine not less than twenty-five thousand rupees extending up to five lakh
rupees or both.
Section 282 further provides that the tribunal can after considering the report of the
liquidator, fix a time limit withinwhichtheproceedingsofwindingupwillbecompleted
and the company willbedissolved.However,itcanalsorevisethetimelimitifitisnot
advantageous and economical to continue the proceedings. If a report regarding the
commission of fraud is submitted to the tribunal, it will order for investigation of the
same and pass any other order and give necessary directions. It can also direct the
company liquidator to file a criminal complaint against people involved in the
commission of fraud.
AccordingtoSection285,aftertheorderofwindingupofacompanyhasbeenpassed
by the tribunal, it will also settle alistofcontributories,rectifytheregisterofmembers
required and apply for the discharge ofassetsofthecompany.Itwillalsodifferentiate
betweencontributoriesintheirownrightsandthosewhoarerepresentativesoforliable
forthedebtsofothers.Whilesettlingthelist,thetribunalmustincludeeverypersonwho
isorhasbeenamember,apersonliabletocontributeanamountsufficientforpayment
of debts and liabilities to the assets of the company upon satisfying the following
conditions:
● A person will not be liable to contribute if he ceases to be a member for
preceding one year before the process of winding up commenced.
● A person will not be liable for any debt or liability of the company which is
contracted after he ceases to be a member.
● Apersonwillnotbeliableunless thepresentmembersarenotabletosatisfy
the required contributions.
● If a company is limited by shares, a person will not be liable for an amount
exceeding the amount unpaid of the shares for which he is liable.
● If a company is limited by guarantee, no contribution will be taken from the
member exceeding the amount to be contributedbyhimtotheassetsofthe
companyifitwasbeingwoundup.Butifthecompanyhasasharecapital,the
memberhastocontributetotheextentofsuchsumunpaidonsharesheldby
him if the company was limited by shares.
Voluntary winding up of a company
When a company decides to wind up its affairs and proceed further with therequired
proceedingsonitsowniscalledthevoluntarywindingupofacompany.Theprocessof
voluntary winding up is given under Insolvency and Bankruptcy Code (IBC) which
maybestartedbyacorporatedebtor,financialcreditororoperationalcreditor.TheIBC
contemplates only one type of voluntary liquidation – i.e., liquidation of the Company,
and there are no members’ or creditors’ voluntary winding up under IBC.
Sec.59(4) and Reg.3(2) Insolvency and Bankruptcy Board of India (Voluntary
Liquidation Process) Regulations, 2017 contemplate filing of resolutions passed by
members and subsequent approval by creditors with ROC and IBBI. Resolution –
ordinaryorspecialshallbepassedwithinfourweeksofdeclarationwhichshalllisteach
debt of the corporate person asperReg.3(4)of InsolvencyandBankruptcyBoardof
India (Voluntary Liquidation Process) Regulations, 2017 .
Creditor’s Meeting
It is necessary to inform the creditors of the company whichcanbedonethroughthe
post.Ameetingisconductedwheretheyarenotifiedabouttheamountofmoneydueto
eachcreditor.Theboardofdirectorswillthenputforththestatementofaffairsandifthe
majority opines that the company should be wound up voluntarily, the process is
initiated. However, if the majority opt for compulsory winding up of the company or
windingupbyatribunal,applicationmustbesentinthisregardtothetribunalwithin14
days and inform the same to the registrar within 10 days. A company liquidator is
appointed to carry on the process of voluntarywindingupaccordingtotheInsolvency
and Bankruptcy Code, 2016 who finally evaluates the assets of the company and
submits the report to the tribunal.
Under 1956 Act, under Section 488(5), when declaration is made, it is members
voluntary windingupandwhensuchdeclarationisnotmade,itiscreditorsvoluntary
winding up. Under the1956Act,u/s.488IftheDeclarationofSolvencyisnotfiledat
least one day before the General meeting wherein the resolution is passed, the
voluntary winding up becomes void.
Procedure of voluntary winding up
Section 59 of the Insolvency and Bankruptcy Code, 2016 deals with the voluntary
liquidation of corporate persons.
Step I: As per Sec.59(1) A corporate person who hasnotcommittedanydefaultmay
initiate voluntary liquidation proceedings under this provision. It provides that a
corporate person who wants to liquidate itself voluntarily and has not committed any
defaultmayinitiatetheliquidationproceedingsundertheAct.However,theproceedings
of a registered corporate person must satisfy the following conditions:
Step II: There must beadeclarationfromthemajorityofthedirectorsofthecompany
which must be verified by an affidavit and must state that:
● Afullinquiryintotheaffairsofthecompanyhasbeenmadeandanopinionhas
beenformedthatthecompanyhasnodebtorwillbeabletopayitsdebtsinfull
from selling its assets in the voluntary liquidation.
● The company is not liquidated in order to defraud any person.
Moreover, the declaration must be accompanied by the following documents:
● Audited financial statements and record of businessoperationsofthecompany
for the previous two years or fortheperiodsinceitsincorporation,whicheveris
later;
● A report of the valuation of assets of the company, if any, prepared by a
registered valuer.
● Reg.3(1)(a) of IBBI (Voluntary Liquidation Process) Regulations, 2017 for LLP
and individuals constituting the governing body in case of other corporate
persons.
● Reg.40(2)Wheretheliquidatorisoftheopinionthatthecorporatepersonwillnot
be able to pay debts in full from the proceeds of assets in liquidation, he shall
make an application to adjudicating authority to suspend the process of
liquidation and pass such orders as it may deem fit.
Step III:As per Section 59 (5), it must be approved by the creditors.
StepIV:Aspecialresolutionregardingthevoluntarywindingupofthecompanymust
bepassedwithinfourweeksofdeclarationorageneralresolutionmustbepassedina
general meeting regarding voluntary winding up due to:
● the expiry of its duration fixed by its articles or
● due to occurrence of any event for which articles provide that the company
should be dissolved.
Step V:Appointment of the liquidator for discharging the liabilities of the company.
StepVI:Withtheapprovalofcreditors,theliquidationproceedingsofthecompanywill
be deemed to have commenced from the date such resolution is passed.
StepVII:Aspersection59(4)andRegulation3ofInsolvencyandBankruptcyBoardof
India (Voluntary Liquidation Process) Regulation, 2017, the company must notify the
Registrar and Insolvency and Bankruptcy Board of India within seven days about the
resolutionbeingpassedfortheliquidationofthecompanyfromthedatesuchresolution
is approved by the creditors.
Step VIII: When the affairs of a company have wound up completely and its assets
have been liquidated completely, an application will be made by the liquidator to the
Adjudicating Authority for the dissolution of such a company.
Step IX: The Authority will pass an order regarding dissolution of the companyandit
will be dissolved accordingly.
Step X: The copy of said ordermustbegiventotherequiredauthoritywithwhichthe
company is registered within fourteen days.
Documents Required for Voluntary Winding up of a Company
For the voluntary winding up of a company, the following documents are required:
● Special Resolution (Form-26): A document proving the company's decision to
wind up.
● DeclarationofSolvency(Form107):Astatementshowingthecompanycanpay
its debts.
● Directors' Affidavit: A sworn statement verifying financial documents like the
auditor’s report and accounts up to the most recent date before declaring
solvency.
● Liquidator's Consent: Agreement from the appointed liquidator toundertakethe
winding-up process.
● NoticeofWindingUpResolution:ApublishednoticeintheOfficialGazetteabout
the company's decision to wind up.
● NoticeofLiquidatorAppointment:ApublishednoticeintheOfficialGazetteabout
the liquidator's appointment.
● Preliminary Liquidator's Report: An initial report from the liquidatoroutliningthe
winding-up plan.
● Final Liquidator's Report and Accounts: The liquidator's comprehensive final
report and financial statements were presented at the last shareholders' meeting.
● Notice of Final Meeting: Announcement of the company's conclusive gathering.
● Meeting Return: Documentation of the final report, accounts, and meeting
minutes to be submitted to the company registration office.
Winding up of unregistered companies
PartIIofChapterXXIdealswiththewindingupofunregisteredcompanies.Section375
oftheActprovidesthatanunregisteredcompanycannotbewoundupvoluntarilyunder
the Act. It provides that such a company will be wound up under the following
circumstances:
● Thecompanyisdissolvedorceasestocarryonthebusinessoriscontinuing
to carry on the business only for the purpose of winding up.
● The company is not able to pay its debts.
● It is just and equitable in the opinion of the tribunal to wind up the company.
TheSectionfurtherprovidesthatanunregisteredcompanywillincludeanypartnership
firm, limited liability partnership, society or cooperative society, associationetcbutwill
not include:
● A railway company incorporated under any Act of Parliament or any other
Indian law.
● Any company registered under the Act.
● Anycompanyregisteredunderthepreviouscompanylawbutnotacompany
whose office was in Burma, or Pakistan.
According to Section 376, a foreign company incorporated outside India but carrying
business in India can be wound up as an unregistered company if it ceases to carry
business in India.
Difference between winding up and dissolution of a company
Dissolutionmeansthatsomethingceasestoexist.Thus,thedissolutionofthecompany
means that its existence has come to an end. Section 302 of the Act deals with the
dissolutionofacompanybythetribunal.Itprovidesthatwhenacompanyanditsaffairs
have wound up completely, the company liquidator can apply to the tribunal for
dissolution of the company. The tribunal if satisfied can order for dissolution of a
company. A copy of the order istobesenttotheregistrarwithin30days.Thiswillbe
done by the company liquidator, but if he fails to do so he will be punished.
However,windingupanddissolutionarenotthesamebutdifferenttermswithdifferent
meanings.Windingupdoesn’tmeanthatthecompanyhasdissolved.Itonlypavesthe
way for the dissolution of the company, which further means that the company has
ceased to exist. The difference between the two is as follows:
Basis of Winding up Dissolution of company
difference
Meaning It is the process by which the Dissolution of the company
dissolution of a company is initiated. meansthatthecompanyhas
ceased to exist.
Existence of Afterwindingup,thelegalentityofa Dissolution means that even
company company continues to exist, and it the legalentityofacompany
can be sued. comes to an end.
Business of Under the process of winding up, a Ceases on dissolution.
company company is allowed to continue its
business for the benefit of winding
up.
Case laws surrounding winding up of a company
I. IL & FS Engineering and Construction Company Ltd. v. Government of
Karnataka (2019)
Facts of the case
The petitioner in this case is a company which carries on the business of
construction of infrastructure and is registered under theCompaniesAct,1956.
The petitioner and respondent enteredintoacontractforconstructionwork,but
hadcertaindisputesduringtheexecution.Arbitrationwasinvokedbytheparties
and an award was passed, but the respondent failed to settle the payments
according to the terms of the award. The presentpetitionwasfiledseekingthe
direction to the Government of Karnataka to wind up the respondent i.e.,
Bangalore Development Authority (BDA) due to non-compliance of the arbitral
award and to further appoint an official liquidator.
Issues involved in the case
● Whether Bangalore Development Authority is a company?
● Whether winding up has to be ordered against the authority?
Judgment of the court
The petitioner in this case contendedthattheauthorityislikeacompanyofthe
state government and is a body corporate. On the other hand, the respondent
contended that BDA is a local authority and so theprovisionsofwindingupdo
not apply. The Karnataka High Court observed the ingredients of winding up as:
● The court is not bound to order for winding up of acompanymerelyonany
one of the circumstances enumerated under the Companies Act.
● The effect of winding up is that it will put an endtothebusinessorindustry
resulting in loss of employment to several employees.
● Winding up means a commercial death of the company and the court must
take into consideration not only the inability to pay debts but the entire
position.
● Unpaid creditors can aspire for an order of winding up.
● Winding up cannot be adopted as a recourse to recovery of the debt.
● Winding is the last thing a court can do and leads to:
○ Closing of a company.
○ Employment of numerous people ceases.
○ Loss of revenue to the state.
○ Scarcity of goods and employment opportunities.
● Petitionofwindingupisnotanalternativeformofresolvingthedisputerelated
to debt.
The courtobservedthatBDAfailedtosatisfytheingredientsofdeterminationof
the government company and so is not a company accordingly an order for
winding up cannot be made.
II.M/SKaledoniaJuteandFibresPvt.Ltd.v.M/SAxisNirmanandIndustriesLtd.
& Ors. (2020)
Facts of the case
Thesecondrespondentinthiscasefiledapetitionin2015beforetheAllahabad
HighCourtforthewindingupofthefirstrespondentcompanyonthegroundthat
itwasnotabletopayitsdebts.Anoticewasissuedtotherespondentbutitfailed
toappealbeforethecompanycourtasaresultofwhichthepetitionwasadmitted
and directed to be published. The company courtorderedforwindingupofthe
companyonthegroundsthatitwasjustandequitableandthatthecompanywas
not able to pay its debts. The company court further appointed the official
liquidator in this regard.
Thereafter, thefirstrespondentfiledanapplicationinordertorecalltheorderof
winding up and also paid the due amount to the creditor i.e., the second
respondent. This application was opposed by the official liquidator on the
grounds that money wasduetoalotofcreditors.Theappellantwhoclaimedto
be the creditor of the company moved an application before the National
CompanyLawTribunalunderSection7oftheInsolvencyandBankruptcyCode,
2016 (IBC, 2016). An application seeking transfer of winding up petition to the
NCLT, Allahabad was also moved to the High Court. However, the application
was rejected on the grounds that the order for windinguphadalreadypassed.
Aggrieved by the rejection of the application, the civil appeal was filed in the
Supreme Court.
Issues involved in the case
● Under what circumstances, a winding up proceeding whichispendingin
the High Court be transferred to the NCLT?
Judgement of the court
ItwasobservedbytheHon’bleSupremeCourtthatthetransferofproceedingsof
windingupdependsonthestageatwhichtheyarependingbeforethecompany
court. The fifth proviso to Section 434 of the Act gives a choice to thepartyto
seek transfer of winding upproceedingstotheNCLT.Thependingproceedings
for winding up have been categorized into three types:
● Proceedings for voluntary winding up.
● Winding up on the basis of inability to pay debts.
● Grounds other than inability to pay debts.
ThecourtfurtherobservedthattheobjectofIBCwillbenullifiediftheHighCourt
of Allahabad is allowed to proceed with theprocessofwindingupandNCLTis
allowed to proceed with the enquiry into an application filed underSection7of
the Code. Thus, the proceedings forwindingupwhichwerependingbeforethe
High Court of Allahabad were ordered to be transferred to the NCLT.
Conclusion
Winding up canbeunderstoodasthelaststageinthelifeofacompany,afterwhichit
dissolves. The present Companies Act, 2013 provides for two modes of whichhave
been explained above. The National Company Law Tribunal (NCLT) has been
established in this regard to tackle the issues of winding up. Further, the National
Company Law Appellate Tribunal (NCLAT) has been established to deal with the
appeals arising from the decisions of NCLT.
Company Liquidators
Appointment of official liquidator
Theofficialliquidatorisanofficerwhoisappointedtoproceedwiththewindingupofa
companyanditsaffairs.Section275providesthatinordertowindupacompany,the
tribunal will appoint an official liquidator from a panel maintained by the Central
Government which consists of names of advocates, Chartered Accountants,
Company Secretaries, CostAccountantsetc.havingatleasttenyearsofexperience
inthemattersrelatedtothecompany.However,ifaprovisionalliquidatorisappointed,
hispowerswillberestrictedbyanorderofappointmentbythetribunal.Aprovisional
liquidator is a person appointed by the court or tribunal to carry on the process of
winding up of a company.
The central government alsohasthepowertoremovethenameofanypersonfrom
the panel on the grounds of misconduct, fraud, breach of duties, professional
incompetence etc, but before doing so an opportunity to be heard mustbegivento
him. The liquidator so appointed must within seven days of appointment make a
declaration regarding conflict of interest or lack of independence with respect tohis
appointment with the tribunal.
According to Section 276,aprovisionalliquidatororacompanyliquidatorappointed
by the tribunal can be removed by the tribunal on the following grounds:
● Misconduct;
● Fraud or misfeasance;
● Professional incompetence or failure to exercise due care and diligence;
● Inability to act as a liquidator;
● Conflict of interest or lack of independence during the term of appointment
Powers of liquidator
I. According to Section 277(5), a company liquidator will be the convener of
meetings of the winding up committee which will assist in the liquidation
proceedings and related functions like:
● Take over the assets.
● Examination of statement of affairs.
● Recovery of property and other assets of the company.
● Review of audit reports and accounts.
● Sale of assets.
● Finalizing the list of creditors and contributories.
● Compromise and settlement of claims.
● Payment of dividends.
● Any other function.
The company liquidator is alsorequiredtosubmitareportalongwithminutes
of meetings of the committee beforethetribunal.Thereportwillbesubmitted
on amonthlybasisandwillbesignedbythememberspresentinthemeeting
tillareportfordissolutionofthecompanyissubmitted(Section277(6)).Hewill
also prepare a draft final report for the approval of thewindingupcommittee
(Section 277(7)).
II. According toSection 290,the Company liquidator willhave the power to:
● Manage the business of the company for the process of winding up.
● Executedeeds,receiptsandotherdocumentsonbehalfofthecompany
and use its seal if necessary.
● Sell the immovable and movable property andactionableclaimsofthe
company, either by public auction or private contract.
● Sell the undertaking of the company.
● Raise money required for the security of assets of the company.
● Institute or defend suits or other legal proceedings, whether civil or
criminal, on behalf of the company.
● Settle claims of creditors, employees or any other claimant and
distribute the sale proceeds.
● Inspect the records and returns of the company.
● Draw, accept, make and endorse any negotiable instrument which
includesacheque,billofexchange,hundiorpromissorynoteonbehalf
of the company.
● Obtain any professional assistance from any person or appoint any
professional for the protection of assets of the company.
● Take actions and steps and sign, execute and verify papers, deeds,
documents, applications etc for windingupofthecompany,distribution
of assets and discharge of duties and obligations of liquidator.
Duties of company liquidator
According toSection288,itisthedutyofthecompanyliquidatortomakeperiodical
reports to the Tribunal and make reports at the end of each quarter regarding the
progress of winding up of the company. Section 292 deals with the exercise and
control of powers of company liquidators.Thecompanyliquidatorisrequiredtogive
regard to the directions givenbythecreditorsorcontributoriesinaresolutionatany
general meeting or by the advisory committee. The directors of creditors and
contributories will override those givenbytheadvisorycommitteeincaseofconflict.
The company liquidator can also:
● Summon the meetings of creditors or contributories.
● Summon meetings as and when directed or requested by the contributories
and creditors in writing by not less than one-tenth.
If a personisaggrievedbythedecisionoranyactofthecompanyliquidator,hecan
make an application to the tribunal, whichcanfurtherconfirm,reverseormodifythe
decision. Section 294 of the Act further provides another duty of the company
liquidator to maintain proper and regular books of accounts, receipts and payments
which will be presented tothetribunaltwotimesineachyearduringhistenure.The
tribunalcancausetheaccountstobeaudited,andthecompanyliquidatorwillhaveto
furnish such vouchers and information to the tribunal as required. One copy of the
audited accounts will be filed with the tribunal and the other will be deliveredtothe
registrar. If the account refers toagovernmentcompany,thecompanyliquidatorwill
give a copy to the:
● Central Government if it is a member of the government company.
● State government if it is a member of the company
● Both the governments, if they are members of the company.
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