Winding Up

By | June 5, 2018

Introduction:

‘Winding up’ of a company is the process of closing or finishing up of a company. Under this process, the company ceases to carry on its business. The management of its affairs is taken out of its director’s hands. Instead, an administrator called liquidator is appointed, who takes control of the company in his hands. He realizes its assets and pays its debts from the money so realized. And finally distributes the surplus, if any, among the members in accordance with their rights. Thus, at the end of the winding-up process, the company will have no assets or liabilities and therefore it will take simply a formal step for its dissolution i.e., for bringing an end to its legal personality. In this way, winding-up may be defined as a process of closing down a company after the realization of its assets, payment of its liabilities and distribution of any remaining surplus among its members. The winding-up is also called ‘liquidation’ in common parlance.

Winding up of company differs from the insolvency of an individual or a partner in as much as a company cannot be made insolvent under the law of insolvency. Moreover, even a solvent company may be wound-up.

Winding up of a company is different from its dissolution. Winding-up is the process of closing or finishing a company. During this process, the company legally exists. It means that after winding-up and before dissolution the legal entity or existence of the company remains as it is and therefore it can be sued in a court of law. ‘Dissolution’ of a company means the termination of the legal existence or personality of the company.

After the dissolution of a company, it cannot be sued because at that time it does not remain in legal existence. On dissolution, the name of the company is struck off the Register of companies by the Registrar and this fact is published in Official Gazette. Thus, a company is created by law and terminated by law through dissolution. In fact, winding-up of company precedes its dissolution. As soon as the affairs of the company are fully wound-up, the liquidator calls the final general meeting of the company and thereafter follows the dissolution.

Modes of Winding Up

Chapter XX of the Companies Act, 2013 regulates the winding-up of companies in India. Under s. 270, it enumerates broadly two modes of winding up of a company –

  1. By the Tribunal (National Company Law Tribunal)
  2. Voluntary

These methods extend to any special law also, which provides for different provisions for winding-up of companies, then under that act, winding up could be done by using the provisions provided under that act, plus using modes given under s.270 of Companies Act.

Section 255 of The Insolvency and Bankruptcy Code, 2016 has been notified with effect from November 15, 2016, and by virtue of Section 255, the 2013 Act stands amended in accordance with Schedule XI of the Code. The aforesaid Schedule XI now defines the term “winding up” by introducing a new Section 2(94A) to the 2013 Act as “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.”

On a bare reading of the definition, it shall be safe to conclude that winding up proceedings will now be governed by the provisions of 2013 Act as well as the 2016 Code. The other significant changes introduced by the Code to the 2013 Act include removal of provisions of ‘voluntary winding up’ and winding up on the ground of ‘inability to pay debts’ from the 2013 Act as the proceedings relating to these now find a place under the Code.

Winding Up by the Tribunal (Compulsory Winding up)

Section 271 lays down that a tribunal may order for winding-up a company, if a petition under section 272 is presented to the court, with any of the grounds provided under section 271. The grounds provided therein are:

  1. If the company is unable to pay its debts
  2. If the company has resolved by special resolution that the company be wound up by the Tribunal
  3. If the company has acted against the interests of the sovereignty and integrity of India, security of the State, friendly relations with foreign states, public order, decency or morality;
  4. If the tribunal has ordered the winding up of the company under Chapter XIX, which relates to ‘Revival and Rehabilitation of Sick Companies’.
  5. If on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
  6. If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years;
  7. If the tribunal is of the opinion that it is just and equitable that the company should be wound up.

The ground (g) is very broad in its words. ‘Just’ means legally valid or lawful; and ‘equitable’ means valid in equity (impartial or fair right or claim), as distinct from common law or statute law. What is ‘just and equitable’ ground or cause calling for winding-up of a company, will depend upon the facts, information, and circumstances of each particular case. Such just and equitable grounds may be different from, when the main object of the company has failed; when the company proposed to acquire some running business but the vendor refused to sell it to the company.

The petition to the Tribunal for the winding up of a company shall be presented by the company, or any creditor or creditors, (including any contingent or prospective creditors), any contributory or contributories, the Registrar, any person authorized by the Central Government in that behalf, or by the Central Govt. or state govt. in a case falling under clause (c) of subsection (1) of s. 271.  (s.272, Companies Act, 2013).

The Tribunal may, on receipt of a petition for winding up under section 272 pass any of the following orders, namely: (a) dismiss it, with or without costs; (b) make any interim order as it thinks fit; (c) appoint a provisional liquidator of the company till the making of a winding-up order; make an order for the winding up of the company with or without costs; or any other order as it thinks fit. The order has to be made within 90 days from the date of presentation of the petition. (S.273). Tribunal shall direct the company to file its objections along with a statement of its affairs if a prima facie case for winding up exists in the eyes of the Tribunal.

The Tribunal shall appoint A Company liquidator in accordance with s. 275, and may remove him in accordance with s. 276 of the act. Company Liquidator as defined under s. 2(23) of the Act, is a person appointed by the Tribunal in case of winding up by the Tribunal.

The Company Liquidator thus appointed, shall be the convener of the meetings of the winding up committee which shall assist and monitor the liquidation proceedings in following areas of liquidation functions, namely:- (i) taking over assets; (ii) examination of the statement of affairs; (iii) recovery of property, cash or any other assets of the company including benefits derived therefrom; (iv) review of audit reports and accounts of the company; (v) sale of assets; (vi) finalisation of list of creditors and contributories; (vii) compromise, abandonment and settlement of claims; (viii) payment of dividends, if any; (ix) any other function, as the Tribunal may direct from time to time.

The company liquidator shall place before the Tribunal a report along with minutes of the meetings of the committee on monthly basis duly signed by the members present at the meeting. The Company Liquidator shall prepare the draft final report for consideration and approval of the winding up committee. The final report so approved by the winding up committee shall be submitted by the Company Liquidator before the Tribunal for passing of a dissolution order in respect of the company. (S.277). Company liquidator has to submit its report within 60 days from the order passed by the tribunal, containing various financial details of the company, in accordance with s. 281. Powers and duties of Company Liquidator are given in detail under s. 290, which briefly confers functional powers to the liquidator, which are needed to resolve all the claims and liabilities of the company, so that it can be dissolved.

Check on the Liquidators powers is provided by S. 292, the power of which is given to the creditors or contributories, which can give him any direction at any general meeting or by the advisory committee. The Company Liquidator also need to maintain proper records, regarding minutes of meetings, books of account, etc. Such records may be audited on the order of the Tribunal. (S. 293-294).

The Tribunal shall have jurisdiction to entertain, or dispose of (a) any suit or proceeding by or against the company; any claim made by or against the company, including claims by or against any of its branches in India; (c) any application made under section 233; (d) any scheme submitted under section 262; any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, rights, entitlements, … whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises or such application has been made or is made or such scheme has been submitted, or is submitted, before or after the order for the winding up of the company is made. (s. 280)

The tribunal also has the power to stay the process of winding up at any stage, on an application of promoter, shareholder, or creditor, if it is satisfied, that it is just and fair that an opportunity to revive and rehabilitate the company be provided.

The tribunal also has the power to make calls on any of the contributories, to the extent of their liability, for payment of any money, which the tribunal considers necessary to satisfy the debts and liabilities of the company, and the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves. (s.296). Tribunal may order, summon before it any officer of the company or person known or suspected to have in his possession any property or books or papers, of the company, or known or suspected to be indebted to the company, or any person whom the Tribunal thinks to be capable of giving information regarding affairs, etc. of the company. (s.299), including directors, promotors examinations also (s.300).

When the affairs of a company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of such company. The Tribunal shall on an application filed by the Company Liquidation under subsection (1) of section 302, is of the opinion that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly.

Section 271(1)(a) of 2013 Companies Act, which dealt with the winding up be Tribunal on account of inability to pay debts has been omitted by Section 255 of The Insolvency and Bankruptcy Code, 2016. The same is now dealt with in accordance with the provisions of Section 7 to 9 of the Code, being the initiation of corporate insolvency resolution process by financial and operational creditors.

An application to the adjudicating authority (being the National Company Law Tribunal) for the initiation of corporate insolvency resolution process can be made only when there is a “default” in payment of debt by a corporate person. In this regard, it is to be noted that the term “default” has been defined in the Code to mean non-repayment of a debt, whether whole or in part, which has become due and payable by a corporate person. This would imply that now under the Code, insolvency resolution proceedings can be initiated even against a financially solvent “default” under the Code. Once the application for initiation of corporate insolvency resolution process is made and the same is accepted by the Tribunal, an insolvency professional is appointed for conducting the corporate insolvency resolution process. The process is required to be completed within 180 days from the date of admission of the application by the Tribunal, on the failure of which, Tribunal may pass an order for the liquidation of the corporate person in relation to whom the application was made.

Under the Companies Act, 2013, winding up applications could be made on account of “inability to pay debts”. The expression “inability to pay debts” has been interpreted by Andhra Pradesh High Court in the case of Reliance Infocomm Limited v. Sheetal Refineries Private Limited, to mean a situation where a company is commercially insolvent, i.e. the existing and provable assets would be insufficient to meet the existing liabilities. Therefore, a remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the earlier regime. However, this is now feasible under The Insolvency and Bankruptcy Code, 2016.

It must be noted that, if a petition is made to NCLT with a ground under s.271(1)(a), the procedures which NCLT will adopt will be according to the Insolvency and Bankruptcy Code, 2016, and not only according to the Indian Companies Act, 2013.

Voluntary Winding up:

When members and creditors of a company decide to wind-up the company without the intervention of the Tribunal, it is known as voluntary winding-up of a company. Voluntary winding-up is very common because there are not so many restrictions in this type of winding-up as are found in case of winding-up by Tribunal.

Section 304 lays down that a company may be wound up voluntarily in either of the following two ways:

  • If the company in general meeting passes a resolution requiring the company to be wound up voluntarily as a result of the expiry of the period for its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company should be dissolved; or
  • If the company passes a special resolution that the company is wound up voluntarily.

Section 305 obligates on the director or directors of the company to make a declaration, stating that they have made a full inquiry into the affairs of the company and they have formed an opinion that the company has no debt or whether it will be able to pay its debts in full from the proceeds of assets sold in voluntary winding up or not. Any director of a company making a declaration under this section without having reasonable grounds for such opinion, shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to five years or with fine which shall not be less than 50,000 Rupees, but which may extend to three lakh rupees, or with both.

Section 306 mandates a company to call up a meeting of creditors, either on the same day or on next day. The Board of Directors have to present a full statement of the position of the affairs of the company, with a copy of the declaration made under section 305, and the estimated amount of the claims, with a list of creditors of the company, before such meeting. If two-thirds in value of creditors of the company are of the opinion that it is in the interest of all parties that the company is wound up voluntarily, then only the company shall be wound up voluntarily. But, if the creditors decide that Company is wound by the Tribunal in accordance with the provisions of Part I of Chapter XX of Companies Act, 2013, the company shall have to make an application before the Tribunal within fourteen days. The provision also provides penalty both for the company and for defaulting director.

Where a company has passed a resolution for voluntary winding up and a resolution under sub-section (3) of section 306 is passed, the company has to publish a notice of the resolution by advertisement in the Official Gazette and also in a newspaper in the district where the registered office of the company is situated. (S. 307)

In the case of a voluntary winding up, the company shall from the commencement of the winding up cease to carry on its business except as far as required for the beneficial winding up of its business.

The Central Government notified section 59 of the Insolvency and Bankruptcy Code, 2016, on 30th Match 2017. This provision of the code provides for the procedure to be followed in a voluntary winding up process. Subsequently, the Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016, by exercising its powers accorded by Section 59, 106 and 208, read with Section 240 of the code, on 31st March 2017.

The recently notified section 59 stipulates that any corporate person can voluntarily liquidate itself if it has not committed any default, may initiate voluntary liquidation proceedings under the provisions of the Code.

The Board can make specific provisions regulating voluntary liquidation proceedings, but these proceedings must include according to s. 59(3) of the act, a declaration from majority of the directors of the company verified by an affidavit stating that, they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and the company is not being liquidated to defraud any person. The declaration has to be accompanied with, audited financial statements and records of business operations of the company for the previous two years or for the period since its incorporation, whichever is later; a report of the valuation of the assets of the company, if any prepared by a registered valuer.

Within four weeks of a declaration, there shall be a special resolution of the members of the company in general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or a resolution of the members of the company requiring the company to be liquidated voluntarily as a result of expiry of period of its duration and appointing an insolvency professional to act as the liquidator. This resolution has to be passed and approved by creditors representing two-thirds in value of the debt of the company. The company has to then notify the Registrar of Companies and the Board within seven days of such resolution.

Under the Code, only an insolvency Professional can be appointed as a liquidator, and other requirements under regulation include, that both the insolvency professional and entity to which he belongs, has to be independent of the corporate person. Independence shall be there in the following circumstances:

  • If he is eligible to be appointed as an independent director on the board of the corporate person (company) under section 149 of the Companies Act, in the last three financial years.
  • Is not related to the company in the last 3 financial years.
  • Was neither an employee, partner, proprietor in any of the company’s auditors, cost auditors or companies secretaries firms, nor of a legal or consulting firm, which had any transaction with the corporate person which led the corporate person contributing 10% or more of the gross turnover of such firm in the last three financial years.

         The liquidator’s rights and duties are provided in the code, under s. 35-53.

Where the affairs of the corporate person/company have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority (NCLT) for the dissolution of such corporate person.

Conclusion:

The process of winding-up of a company is not very simple, it includes within it many complexities and technicalities. Earlier there was only one act, which generally governed this area, but now with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide precedence. Hence, nowadays, The area of company law has become a specialized field, because of its technicalities, but it perpetrates other drawbacks too because the person running the company, their linkage with the legal functioning of the company gets broken up. Hence, simple and easier laws are needed, so that even non-legal person can know how to run company, efficiently and legally, without totally depending on lawyers.


–  Harshdeep Singh Bedi

(NLIU, Bhopal)


Sources:

  • http://corporatelawreporter.com/2017/09/12/voluntary-winding-up-dawn-of-the-new-regulations/
  • http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
  • http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
  • https://www.lakshmisri.com/News-and-Publications/Publications/articles/Corporate/winding-uplegal-position-under-companies-act-2013-vis-vis-insolvency-and-bankruptcy-code-2016
  • http://www.chasecambria.com/site/journal/article.php?id=64
  • http://www.legalservicesindia.com/article/1319/Winding-Up-of-a-Company.html
  • https://debtrecoveryqld.com.au/liquidation/
  • Dr.S.M.Shukla, Indian Companies Act, Sahitya Bhawan Publications, 2013.
  • Dr. S.M.Shukla & Dr. K.L. Gupta, Corporate Accounting, Sahitya Bhawan Publications, 2013.

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