Winding Up of Companies

By | December 30, 2020
Winding Up of Companies

The whole process of bringing a legitimate end to the life of a firm is broken into two steps. These two processes are winding up of companies and dissolving them. Company winding is described as a mechanism by which a company’s life is put to an end and its property is handled for the benefit of its members and creditors. That is the last step that brings an end to a company’s existence.

The primary aim of winding up is to identify the properties and make the instalments of the loans of the business equitable. Thus, winding up is the mechanism by which control of the activities of a corporation is separated from its directors, a liquidator discovers its assets, and discharges its debts from the proceeds of realisation.

I. Introduction

There may be many reasons for the company’s winding – up, including shared arrangement between creditors, loss, insolvency, death of promoters, etc. A business may be wound up either by a tribunal or by voluntary winding up, as per section 270 of the Companies Act, 2013. The provisions of the Act provide appropriate processes for the liquidation of a corporation.

A formal process for permanently closing down a corporation is the winding up of the company. That is a mechanism by which the legal life of the Company meets an endpoint in which the Company falls under the control of a Liquidator for dissolution.

At this critical stage of the lifespan of the Company, the Liquidator controls and maintains the funds of the Company to ensure that the benefit of the creditors is not hindered. Dissolution finally kicks in, in which the Corporation is disbanded and the Registrar of Companies strikes the name off. Thus, the life of the company draws to a close.

II. Winding Up v. Dissolution

The corporation does not cease to exist as such upon winding up, even that it is dissolved. The company’s operating equipment is altered when the management is passed to the liquidator’s side and after the winding-up begins, the company’s properties belong to the company before the breakup takes place. The corporation ceases to exist on dissolution as a single company and becomes unable to retain, sue and be sued on its own property. Thus, between the time of winding-up and closure, the legal existence of the corporation continues to exist.

In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony [1], the Supreme Court held that the dissolution was followed by a winding-up. There is no statutory clause vesting in a trustee or having the effect of abrogating the assets of the dissolved company. A dissolved company’s owners or creditors cannot be considered as its descendants and descendants. Its assets, if there are any, vest in the government upon dissolution.

It has been difficult to enforce rules concurrently with the enactment of the Insolvency and Bankruptcy Code, 2016 and to determine precedent. A lot of changes to the Act were also contained in the IBC. The Code presents organisations with a proactive structure. There are only two forms of winding up after the passage of the Insolvency and Bankruptcy Code: either under the Companies Act of 2013 or the IBC Code of 2016. Winding up under this Act i.e., the Companies Act or the Insolvency and Bankruptcy Code, 2016, under section 2(94A).

III. Winding up Under Company’s Act, 2013

There were two ways of winding up up prior to the Insolvency and Bankruptcy Code, the first being the voluntary winding up of sections 304 to 323 under the Companies Act and the second being winding up by the tribunal. With the passage of the code, the first was deleted and instead, compulsory winding up, i.e., winding up, but the current method under the 2013 Act is the Tribunal.

IV. Winding Up by the National Company Law Tribunal (Compulsory Winding Up)

The Tribunal can perform a winding-up if any of the conditions mentioned in section 271 are satisfied. The Tribunal may order the winding up of the company at the request of any individual who is authorised under section 272.

  • A Company Can be Wound Up by the Order of the Tribunal:

  1. Where the company has agreed, by special resolution, that the company should be wound up by the Tribunal;
  2. Where the company has operated against the interests of India’s sovereignty and integrity, security of state, good ties with foreign nations, public policy, decency or moral standards;
  3. Where an application is filed by the Registrar or any other individual approved by the Central Government and the Tribunal finds that the company’s affairs have been carried out in a fraudulent manner.
  • If the Company was Designed for Fraudulent and Unlawful Purpose or

Where the individuals in the administration of the company’s affairs are guilty of fraud, misconduct or misconduct and should be winded up in the interest of justice;

  1. The company refused to file its financial statements or annual accounts with the Registrar for the immediately preceding five successive financial years; or
  2. When the Tribunal is of the view that it is right and fair that it can no longer be in business, the firm must be wound up.

With the passage of the Insolvency and Bankruptcy Code, reasons for failure to pay debt and winding up have been removed.

  • Winding Up by Special Resolution (Section 271)

The company’s special resolution could determine that the Tribunal must wound up the Company. It is possible to pass the resolution for any reason. The Tribunal would see, though that the liquidation is not contrary to the general interest or to the needs of the corporation as a whole.

The Tribunal has also to take into account the company’s potential to have a financial turnaround as the company suffered damages that forced the company to pass a special winding-up resolution. This provision is based on the presumption that as corporate bodies, shareholders have the necessary right to judge and determine whether or not the corporation can go out of existence.

It is the owners who have created the business and hence it is for them to dismantle the business. Without the control of the general meeting, the directors are not allowed to file a winding up motion. Subject to approval of the resolution, the directors will file this document.

The company must hold a general body meeting to pass a special resolution containing, in particular, its intention to wind up the Tribunal and set out the reasons for the explanatory note attached to it stating why it is imperative to wind up the company. It should be remembered that the court has the right to order the winding-up and is not under any obligation.

Company acting against the interests of sovereignty and integrity of India or of the security of the State or even of the friendly relations with foreign States.

Because of the geo-political scene and its contours, the remaining grounds of public order, decency and morals, such grounds as behaving against the interests of Indian sovereignty and integrity or the protection of the State or even friendly ties with foreign States, do not seem to belong to the same strain. The other factors remain a point of contention as there are enforcement bodies that can regulate them if the companies indulge in public indecency [2].

V. Company Affairs Conducted in a Fraudulent and Unlawful Manner

Any person authorised by the Central Government or the Registrar can apply for the winding-up proceedings before the Tribunal. The Tribunal may order the winding up on-premises such as –

  1. Conducting the company’s affairs and management in a fraudulent manner;
  2. The organisation was established for unlawful or fraudulent purposes; or
  3. The parties involved are responsible for bribery, misconduct or neglect in connection with the establishment of the company or the administration of its affairs.
  4. The company made a default in the filing of its financial statements with the Registrar.

Section 271(d) sets out the conditions for the winding-up of the company in the case of a breach in the reporting of the annual financial statements or in the annual returns. It is a significant feature to ensure that in organisational company administration there is no reward for non-accountability and indiscipline and that government corporations are not exceptions.

If a default is made over five successive financial years, the winding up clause can be invoked. In any financial statements or annual returns, there may be defaults. This is therefore true if the annual return has been filed for five straight financial years, but the financial statements have not been filed on a regular basis. The opposite is also applicable. The crux and the main measure is that for five straight financial years, there may have been a default in one of the two cases. The immediate precedent of five straight years must be further emphasised [3].

VI. Just and Equitable

The Tribunal also may order that a company be winded up if it finds that the company should be wound up for fairness and equity. For a winding-up order, this is a fully separate and independent ground. To the degree that this is applicable, it is meaningless that the conditions should conform to those which, on one of the six grounds, warrant an order.

In exercising its authority on this ground, the Tribunal shall give due consideration to the interests of the company, its employees, its creditors and shareholders and to the public at large. The relief is like a last solution where the other solutions are not successful enough to safeguard the company’s general interests.

When the company has neglected to build the company’s key assets; the basic overview here is the case of German Date Coffee Co, where a corporation was set up to produce coffee on the basis of a patent to be issued by the Government of Germany and to be granted various licences. The German patent was not issued and separate and distinct licences were established by the company. In any event, on the investor’s appeal, it was held that the company’s substratum had ran its course and that the papers for which it was framed were impossible to complete; and so, it was fair and equal for the company to be winded up. [4]

In Seth Mohan Lal v. Grain Chambers Ltd., the Court can make an order to wind up a company pursuant to Section 162 of the Indian Companies Act, 1956, if the Court is of the opinion that it is reasonable and appropriate for the company to be wound up. The Court would weigh the interests of the owners as well as of the creditors when issuing an order to wind up on the basis that it is fair and rational that a company should be wound up.

The Company’s substratum and aims are said to have vanished if the purpose for which it was incorporated has failed significantly, or if the Company’s operation is difficult to carry on even at a loss, or if the remaining and future assets are deficient to satisfy the current liabilities. In the event of a substantive failure of the purpose with which the Company was formed, it cannot be claimed that the Company is not in a position to carry out its operations even at a loss, nor that its assets are insufficient to satisfy its responsibilities [5].

In the exercise of the Court’s powers and on the grounds of equity and fairness pursuant to Section 443(1)(b) of the Act, the Court deferred the final judgement on that petition for a period of one year, given that during that period, the parties take such measures to assert their cases as to establish a clear balance of equities either in favour of or against a liquidation order in the case of Aluminium Corporation of India Ltd. v. M/s. Lakshmi Rattan Cotton Mills Co. Ltd. [6]

In the landmark case of Yenidje Tobacco Co. Ltd., the relationships between the two directors, who were the only shareholders, worsened to the point that they ceased to talk to each other at the same time the company itself began to thrive and in fact, the company made rather greater profits than it did until the conflict became so intense. The Court of Appeal unanimously ruled that it be wound up, regardless of this fact [7].

It can also be seen that the learned Judge applied to the facts of that case the principle of a just and equitable clause, since the conditions occurring, in that case, were of an extraordinary type. In any case, however, we must decide whether a theory which is usually confined to the two types of cases, viz., can be applied to the facts or to the particular instance where the substratum of the company has gone or where there is a full dead-lock in the administration of the company’s affairs [8].

VII. The Procedure of Winding Up [9] (Section 274 to Section 365)

A sequential process of winding up under the Act is important to understand. The process provided for under the law shall be as follows:

If it is convinced that a prima facie case exists, the Tribunal can order the Company to be wound up. The Tribunal also orders the Company to file its appeals within 30 days of the order along with a statement of its affairs (this timeline may be extended under special circumstances).

Furthermore, the Tribunal shall also name a temporary liquidator or company liquidator at the time of the issuance of the order. The liquidator shall, upon appointment, file a statement of the specified form within seven days of the date of appointment, stating a conflict of interest or a loss of discretion with reference to his appointment.

If the Tribunal has issued a winding-up order, then the directors and such other officials shall compulsorily send the Company’s completed and audited books to the provisional Liquidator within 30 days of that order. If the director or other officers fails to apply the audited books submitted, they shall be individually responsible for fines and incarceration for violation of the provisions of the Act.

The Tribunal shall notify the Liquidator and the Registrar within 7 days of the date on which the order for the appointment of the provisional liquidator is given. The Registrar shall, upon receipt of a copy of the document, accept it and notify the Official Gazette of the order. The Registrar shall, in the case of a public company, notify the stock market or markets where the company’s shares are listed.

The winding-up order shall be considered to be a notice of discharge to the Company’s officers, staff, and personnel, even when the Company’s operation is continued.

Within 3 weeks of the date of issuance of the liquidation order, the liquidator of the company shall apply to the Tribunal an application for the creation of a liquidation committee to support and track the progress of the liquidation order. The liquidator, the representative of the secured creditors, and the competent nominee of the Tribunal will constitute such a body.

No suit or other legal action shall be instituted, or ongoing, for by, or against the Company, except with the leave of the Tribunal, when the order for winding-up is issued.

The Tribunal shall, following the issuance of the order of winding – up, issue an order to set up an advisory committee to assist the liquidator and to report to the Tribunal on matters which the Tribunal may guide. The committee shall not exceed 12 members, headed by the liquidator of the company and composed of the creditors and contributors of the company, or of other individuals, to the degree that the Tribunal may order.

The liquidator must deliver a report to the Tribunal within 60 days after the winding-up order has been released. The text, consisting of the existence and details of the properties, the value of the assets, the amount of capital given, the actual and contingent liabilities, etc., should be exhaustive. It shall also report to the Liquidator on the measures to be taken to increase the valuation of the properties. To check on the success of the Company from time to time, the Liquidator should put periodic reports before the Tribunal.

After scrutinising the Liquidator’s report, the Tribunal shall decide the date during which the entire proceedings are to be concluded and the Company is to be dissolved, or the Tribunal may upon review of the report, order the disposal of the Company as a continuing entity or its properties or part thereof. A sales committee composed of the creditors, promoters, and officers of the Company is then formed to assist the Liquidator in the transaction.

Subsequently, the liquidator of the company shall, on the order of liquidation, take into custody and manage all the properties, results and actionable claims of which the company is or appears to be entitled. The property shall be considered to have been in the possession of the Tribunal as of the date of the winding-up order.

The Liquidator is obligated to send to the Tribunal the records of the receipts and transfers of the Company to be audited and a copy of the audit report to be submitted to the Tribunal and other copies to be submitted to the Registrar for review by any interested borrower, contributor or employee [10].

The Tribunal then directs the donors to pay him some cash owed to the venture. If any money is owed to the contributory by the corporation and the contributory has not paid the entire sum of the share, it is permitted to set off. In addition, the Tribunal may issue summons to those accused of possessing the property of the company and investigate such individuals. Apart from this, a declaration of the same must be submitted by the Liquidator if some other entity has any property of the Company.

The liquidator of the company has the right to call on the creditors to prove their cases, on which a list of creditors is prepared by the liquidator. Each creditor is then told about the approval or denial of their claims. The Liquidator, therefore, guarantees that a notice that the company is being wound up should be included in any invoice, order or business letter provided by or on behalf of the company.

The Liquidator shall make an appeal to the Tribunal for the winding up of the Company after all the formalities have elapsed and the operations of the Company have been fully wound up. If the Tribunal is of the view that it is appropriate and rational to disband the Company following the receipt of the complaint, an order of dissolution is given. The Liquidator shall send a copy of this order to the Registrar.

VIII. Conclusion

The procedure of a company’s winding-up is not very easy; it involves many complications and technicalities within it. There was only one Act previously that traditionally regulated this area, but it has now become more difficult to enforce these laws concurrently and to determine precedent with the implementation of the Insolvency and Bankruptcy Code, 2016. Therefore, because of its technical details, the area of corporate law has now become a specialist sector but it still perpetrates other disadvantages because their association with the legal running of the company is broken up by the individual who manages the company.

For companies and limited liability partnerships, the Code and Legislation have a favourable structure. While the procedure is almost identical to the former regime, the biggest shift in the initiation of the winding-up process has taken place. Earlier, a company or any of its creditors could file a voluntary winding up motion, but the winding-up process will now be started by the company, directors, appointed partners or individuals responsible for exercising their corporate powers. In addition, the consent of creditors covering two thirds of corporate debt is compulsory in compliance with the Code for the initiation of voluntary winding-up proceedings.

To sum it up, a corporation that intends to wind up is now expected to comply with the Insolvency and Bankruptcy Code, 2016. As with the Businesses Act, 1956, the Code is very detailed and broader. Owing to the involvement of four adjudicating bodies, the High Court, the Company Law Board, the Board for Industrial and Financial Rehabilitation and the Debt Recovery Tribunal, the Code is intended to help resolve the delays and difficulties inherent in the method. As all cases would be filed under the Code, it will also reduce the pressure on the courts.


References

[1] (1999) 34 CLA 380 (ALL HC)

[2] Section 271 of Companies Act, 2013

[3] Khan, Z. U. (2015). Political Economy, Concept and Rationale of Winding-up of Companies and Corporate Sector. Journal of Political Studies, 22(1), 87.

[4] German Date Coffee Co In Re  (1882) 20 Ch. D. 169

[5] Seth Mohan Lal v. Grain Chambers Ltd., AIR 1968 SC 772

[6] Aluminium Corporation of India Ltd. v. M/s. Lakshmi Rattan Cotton Mills  Co. Ltd., AIR 1970 All. 452

[7] Yenidje Tobacco Co. Ltd., Re  (1916) 2 Ch. D. 169

[8] Patwari, S. (2014). Voluntary Winding Up in India-A Comparative Analysis. Available at SSRN 2377165.

[9] Section 274 to Section 365 of Companies Act, 2013

[10] Singh, R. K. (2010). Insolvency, Liquidation, and Winding Up Law In India: An Urgent Need for Review. Available at SSRN 1576003.


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Author: Vatsala Sood

Student at Symbiosis Law School, Pune

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