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An estimated 10-minute read

Winding Up of a Company

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The Companies Act 1956 governs and defines the law in relation to conduct of company affairs in the country. It defines a company, what shall constitute a company and how it shall be formed and the manner in which the affairs of the company shall be conducted. The act also provides for rights and duties of the directors and gives to the company a distinct legal personality.

The Act besides the above mentioned also defines the process by which the company is put to an end that is the process through which its corporate existence is ended and it is thereafter finally dissolved. The Companies Act defines this process as “winding up”. It is submitted that winding up is different from dissolution of company and it is winding up that leads to dissolution of the company. Winding up holds a very important place in company matters as it is not only a process that leads to end of a company but has in today’s time also emerged as process or a tool in the hands of creditors who can recover debts and contributory or a shareholder who is of the opinion that the company is not being run in the interest of the same can seek winding up and claim their respective shares in most transparent and fair manner. It is therefore extremely important to understand what is winding up.

Part VII of the Act mentions about winding up. The Act does not define winding up but the provisions under the above mentioned part tries to describe the process of winding up and a conclusion can be drawn that, it is process that leads to bringing an end to the company existence. Winding up is a process that initiates the process for dissolution of the company and finally leads to dissolution of the company whereby the company loses its legal personality and is no longer capable of functioning or being recognized as an entity.

Section 425 states that winding up can be made by the following two modes:

  1. Winding up under supervision of the tribunal or compulsory winding up.
  2. Voluntary winding up.

Compulsory winding up is winding up that takes place under the supervision of the Tribunal whereas Voluntary winding up is winding up takes place upon the resolution voluntarily passed in the general body meeting by the Board of Directors and is carried out without any supervision of the Tribunal. The tribunal mentioned above is Company law Tribunal.

Winding up can be initiated by a company, contributory, Registrar or a creditor or any person authorised by the central government on this behalf in case any one of them is of the opinion that company is not in a position to continue its functioning, or there is  oppression of minority shareholders or mismanagement of the company affairs.

  • Winding Up Under the Supervision of the Tribunal

Winding up under the supervision of the Tribunal can be initiated by presenting a petition with respect to the same by:

  1. The company upon a special resolution passed for the same by the Board of Directors.
  2. By the creditors of the company in case company is unable to pay the debts and the creditor apply for the same.
  3. By the contributory in case statutory meeting are not held or the minimum statutory member numbers have reduced that is 7 in case of public limited company and 2 in case of private limited company.
  4. By a person appointed to check that the affairs of the company are not conducted in a manner to defraud the creditors or other members and is opinion that affairs are conducted so.
  5. By the Registrar with the approval of central government.
  6. By the central or the state government in case the company is functioning against the interest of sovereignty of the country.

This petition can be filed by either of the above mentioned in the following mentioned circumstance:

  1. When the company has, by a Special Resolution (3/4 majority shareholders) resolve that the company shall be wound up by the Tribunal.
  2. In case there is default in delivering the statutory report to the Registrar or in holding the statutory meeting.
  3. In case the company fails to commence its business within one year of its incorporation, or suspends its business for a whole year and there is no intention to carry on the business.
  4. If the number of members is reduced below the statutory minimum i.e. below seven in case of a public company and two in the case of a private company.
  5. If the company is unable to pay its debts.
  6. If the tribunal is of the opinion that it is just and equitable that the company should be wound up. Tribunal may inquire into the revival and rehabilitation of sick units. If its revival is unlikely, the tribunal can order it’s winding up.
  7. If the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial year.
  8. if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

Upon the filing of the petition by any of above mentioned, the tribunal may order winding up of the company or may either dismiss the petition. If the tribunal is satisfied that sufficient reasons exists to order winding up then the tribunal may order winding up. Upon the said order, the tribunal may send a notice to the Official liquidator appointed by the government informing about the same and the Liquidator shall take charge of the company and carry out the winding up process. The winding up process shall be applicable to all individuals connected to the company irrespective of the fact whether they had applied for the same or not and these include contributory, creditors etc.

The company is required to submit all the details ranging from assets, creditors, liabilities and accounts to the Liquidator and he is required to send a report regarding the same to the tribunal within six months of receiving the information.

  • Voluntary Winding Up

Under Voluntary winding up, winding up process is initiated and carried out without the intervention of the tribunal. It can be initiated by two modes:

  1. Members
  2. Creditors of the company for any reason.

Generally it is initiated when the company is unable to run or for any other reason that members choose to wind up the company. It is initiated by passing ordinary resolution or special resolution. Ordinary resolution is passed by the Board of directors in case the prescribed period for running the company prescribed by the articles of Association has ended or objective to run the company no longer exists.

Special Resolution on the other hand is passed in case the company is unable to pay the debts then the Board of Directors may decide on winding up the company and thereby paying off the debts. This is known as Creditors Voluntary winding up.

  1. Member Voluntary Winding Up

The board of Directors of the company shall convene a general body meeting and declare with an affidavit that the company has no debts and in case they exists then they are required to make a declaration that the debts shall paid off within 3 years of commencement of winding up proceeding.

The board of directors shall thereafter appoint Liquidator who shall be given charge of the company affairs. The remuneration of the Liquidator shall be fixed and he shall take all the steps required for winding the company affairs. The directors are required to inform about the appointment of the same to the Registrar of the companies and they shall cease to function in company affairs. The liquidator is thereafter required to carry out process and call meeting of the members of the company informing about the same i.e. winding up proceedings on timely basis as prescribed by the Act.

Upon complete winding up of company affairs, the liquidator is required to call a meeting inviting members of the company and informing through an advertisement in newspaper about the date, the time and objective of the same. The liquidator is required to present in the meeting about the winding up procedure followed, the accounts and the manner in which assets were disposed and send a copy of the same to the Registrar and official Liquidator after 1 week of the meeting. The official liquidator is if of the opinion that company is running not in interest of members then it may order dissolution of the company or may order further investigation. With this, company dissolves and the name is struck off from the register.

    2.  Creditor Voluntary Winding Up

Section 500 to 509 of the companies act provides for voluntary winding up by creditors. Under this winding up, the creditors play a pivotal role in winding up proceeding and in fact they dominate the proceeding and are instrumental in winding up proceeding. This winding up proceeding is initiated in case the company is unable to pay the debts and the board of directors are not in position to declare the exact liability of the company towards creditors.

The members of the company are first required to propose winding up resolution and thereafter a notice of the meeting is required to be sent to all creditors and members of the company. The board of directors are required to make a list of creditors and send them notice of meeting. This notice can be either be sent by post and shall also be advertised in the Official Gazette and also in two newspapers circulating in the place where the registered office of the company is situated.

The board of directors are required to give a statement regarding the company affairs and a list of creditors along with list of their claims and dues which shall be placed before the meeting of creditors. A resolution to winding up the company shall bepassed and the resolution to the effect at creditors' meeting shall be filed with Registrar within 10 days of its passing.

Generally in the voluntary winding up by creditors, the creditor shall nominate a Liquidator and this Liquidator is given the charge to handle winding up affair and distribution of the proceeds from the assets for fulfilling the liability of the creditors or any other liability that remains. The creditors may choose to form a five-member Committee of Inspection to supervise the work of liquidator. The creditors or the above mentioned committee shall fix the remuneration of liquidator. Upon the appointment of the Liquidator, the power of Board of Directors with respect to the company affairs shall cease. The creditors or the committee may sanction some power to the Board of directors.

The Liquidator shall call meeting for the members and creditors every year in case winding up continues for than one year or as prescribed by the act informing about the dealing of the company.

The Liquidator by virtue of section 509 upon the complete winding up of the company is required to call a general body meeting of all creditors and members and advertise the same in any leading newspapers indicating about the date, time and objective of the meeting. The Liquidator is required to present all the details about the winding up proceedings and accounts of the company before the creditors.

The Liquidator is required to send an official copy of the same with accounts copy to Registrar and the official Liquidator as appointed by the government as the case may be within one week after the meeting. If the official Liquidator is of the opinion that the affairs of the company are carried out not in interest of the members then it shall order dissolution of the company. The creditor’s liability is paid off and in case a surplus is left then, the members are paid. This completes the process of winding up and dissolution of the company.

The above mentioned are the modes prescribed by the Companies act for winding up and after this process of winding up, the company is dissolved and loses its corporate personality. The above mentioned process also provides a mechanism through which company can be wound up in case it is not running properly or to the detriment of any member, creditor or shareholder providing them with an opportunity to enforce the rights and take active part in affairs of the company.

In fact the above mentioned procedure has emerged as tool and potent weapon in the hands of creditors whose debts if in case are not being satisfied then, by virtue of filing up winding up petition can recover debts.

In conclusion, it can be said that company act has endeavoured to provide an extremely transparent and easy method of winding up which neither complicated nor provides an easy mechanism to put an end to a company keeping in mind interest of all persons who are related to company in any manner.

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