Winding up of the Company

Winding up of the Company

Winding up of the Company is a legal mechanism of permanently shutting down a company. It is a process by which the Company’s corporate existence comes to an end post which the Company goes in for dissolution under the surveillance of a Liquidator. The Liquidator monitors and administers the Company’s assets during this crucial stage of the Company’s lifetime, to make sure the stakeholders’ interest is not hampered. Ultimately, dissolution kicks in, wherein the Company is dissolved, and the name is struck off by the Registrar of Companies. Hence, the Company’s life comes to an end.

Modes of winding up

by the Tribunal winding up
voluntary winding up

PART I.—Winding up by the Tribunal

Circumstances in which company may be wound up by Tribunal.

A company may, on a petition under section 272, be wound up by the Tribunal

(a) if the company is unable to pay its debts;

(b) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;

(c) 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;

(d) if the Tribunal has ordered the winding up of the company under Chapter XIX;

(e) 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;

(f) 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; or

(g) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up

2) A company shall be deemed to be unable to pay its debts

(a) if a creditor, by assignment or otherwise, to whom the company is indebted for an amount exceeding one lakh rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand requiring the company to pay the amount so due and the company has failed to pay the sum within twenty-one days after the receipt of such demand or to provide adequate security or re-structure or compound the debt to the reasonable satisfaction of the creditor;

(b) if any execution or other process issued on a decree or order of any court or tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company

According to Section 272 Petition for winding up

(1) Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by—

(a) the company;

(b) any creditor or creditors, including any contingent or prospective creditor or creditors;

(d) all or any of the persons specified in clauses (a), (b) and (c) together;

(e) the Registrar;

(f) any person authorised by the Central Government in that behalf; or

(g) in a case falling under clause (c) of sub-section (1) of section 271, by the Central Government

or a State Government.

(2) A secured creditor, the holder of any debentures, whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures shall be deemed to be creditors within the meaning of clause (b) of sub-section (1).

(3) A contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder.

(4) The Registrar shall be entitled to present a petition for winding up under subsection (1) on any of the grounds specified in sub-section (1) of section 271, except on the grounds specified in clause (b),clause (d) or clause (g) of that sub-section: Provided that the Registrar shall not present a petition on the ground that the company is unable to pay its debts unless it appears to him either from the financial condition of the company as disclosed in its balance sheet or from the report of an inspector appointed under section 210 that the company is unable to pay its debts: Provided further that the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition: Provided also that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity of making representations.

(5) A petition presented by the company for winding up before the Tribunal shall be admitted only if accompanied by a statement of affairs in such form and in such manner as may be prescribed. 166

(6) Before a petition for winding up of a company presented by a contingent or prospective creditor is admitted, the leave of the Tribunal shall be obtained for the admission of the petition and such leave shall not be granted, unless in the opinion of the Tribunal there is a prima facie case for the winding up of the company and until such security for costs has been given as the Tribunal thinks reasonable.

(7) A copy of the petition made under this section shall also be filed with the Registrar and the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within sixty days of receipt of such petition.

The Procedure of Winding Up (Section 274 to Section 365):

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

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

PART II.—Voluntary winding up

Circumstances in which company may be wound up voluntarily.— A company may be wound up voluntarily,—

(a) 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

(b) if the company passes a special resolution that the company be wound up voluntarily

Declaration of solvency in case of proposal to wind up voluntarily. Where it is proposed to wind up a company voluntarily, its director or directors, or in case the company has more than two directors, the majority of its directors, shall, at a meeting of the Board, make a declaration verified by an affidavit to the effect 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.
The company shall along with the calling of meeting of the company at which the resolution for the voluntary winding up is to be proposed, cause a meeting of its creditors either on the same day or on the next day and shall cause a notice of such meeting to be sent by registered post to the creditors with the notice of the meeting of the company under section 304.
Publication of resolution to wind up voluntarily. Where a company has passed a resolution for voluntary winding up and a resolution under sub-section (3) of section 306 is passed, it shall within fourteen days of the passing of the resolution give notice of the resolution by advertisement in the Official Gazette and also in a newspaper which is in circulation in the district where the registered office or the principal office of the company is situate.
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 company in its general meeting, where a resolution of voluntary winding up is passed, shall appoint a Company Liquidator from the panel prepared by the Central Government for the purpose of winding up its affairs and distributing the assets of the company and recommend the fee to be paid to the Company Liquidator
A Company Liquidator appointed under section 310 may be removed by the company where his appointment has been made by the company and, by the creditors, where the appointment is approved or made by such creditors.
The company shall give notice to the Registrar of the appointment of a Company Liquidator along with the name and particulars of the Company Liquidator, of every vacancy occurring in the office of Company Liquidator, and of the name of the Company Liquidator appointed to fill every such vacancy within ten days of such appointment or the occurrence of such vacancy
On the appointment of a Company Liquidator, all the powers of the Board of Directors and of the managing or whole-time directors and manager, if any, shall cease, except for the purpose of giving notice of such appointment of the Company Liquidator to the Registrar.
The Company Liquidator shall perform such functions and discharge such duties as may be determined from time to time by the company or the creditors, as the case may be.
Where there are no creditors of a company, such company in its general meeting and, where a meeting of creditors is held under section 306, such creditors, as the case may be, may appoint such committees as considered appropriate to supervise the voluntary liquidation and assist the Company Liquidator in discharging his or its functions.
Where the Company Liquidator is of the opinion that a fraud has been committed by any person in respect of the company, he shall immediately make a report to the Tribunal and the Tribunal shall, without prejudice to the process of winding up, order for investigation under section 210 and on consideration of the report of such investigation, the Tribunal may pass such order and give such directions under this Chapter as it may consider necessary including the direction that such person shall attend before the Tribunal on a day appointed by it for that purpose and be examined as to the promotion or formation or the conduct of the business of the company or as to his conduct and dealings as officer thereof or otherwise.
As soon as the affairs of a company are fully wound up, the Company Liquidator shall prepare a report of the winding up showing that the property and assets of the company have been disposed of and its debt fully discharged or discharged to the satisfaction of the creditors and thereafter call a general meeting of the company for the purpose of laying the final winding up accounts before it and giving any explanation therefor.
Where a company (the transferor company) is proposed to be, or is in the course of being, wound up voluntarily and the whole or any part of its business or property is proposed to be transferred or sold to another company (the transferee company), the Company Liquidator of the transferor company may, with the sanction of a special resolution of the company conferring on him either a general authority or an authority in respect of any particular arrangement,
Subject to the provisions of this Act as to overriding preferential payments under section 326, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.
All costs, charges and expenses properly incurred in the winding up, including the fee of the Company Liquidator, shall, subject to the rights of secured creditors, if any, be payable out of the assets of the company in priority to all other claims.