What does winding up of Company mean?

winding up

A company is an artificial person under the lens of law. It has a separate legal entity and therefore its existence is distinct from that of the members. Therefore, events such as death, insolvency, lunacy, etc. do not affect the existence of a company.

Meaning of Winding Up

The process by which a company is terminated is known as a winding up. After the termination, all the property that belonged to the company is administered to its members for their benefit. In other words, all the assets of the company are collected and realized and liabilities are discharged and the net surplus is distributed among its members in accordance with the article of associations [1].

According to Professor Gower, “a process by which the life of the company ends and its property is administered for the benefit of its creditors and members. An administrator called a “liquidator’, is appointed who takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights” [2].

According to Clause (94-A) of Section 2 of the Companies Act, 2013., “Winding Up” means winding up under this act or liquidation under the Insolvency And Bankruptcy Code, 2016, as applicable [3].

Distinction between dissolution and winding up of a Company

The term winding up and dissolution do not mean the same thing under the company law. The following are the main points of the distinction.

1. In order to bring the company’s life to end in a lawful manner is divided into two stages. In stage one, winding up takes place where assets of the company are realized, liability are paid off and the surplus, if any, distributed among the members. In the second stage, dissolution takes place where the whole existence of the company comes to an end in a lawful manner.

2. The legal entity does not get dissolved during the process of the winding-up, it is only in the dissolution stage that the legal entity of the company comes to an end.

3. During the winding-up process the liquidator can represent the company while its power will cease to exist only when the dissolution order is passed by the court.

4. All the necessary business of the company can continue during the winding-up process but at the stage of dissolution, the company cease to exist.

Mode of Winding Up

As per Companies Act 2013, section 270 sub-section clause 1 provides for the modes of the winding up of the company that can be done either by –

Tribunal 

The circumstance under which a company may be wound up by a Tribunal is provided under section 271 of the Companies Act 2013. They are as follows –

a. If the company is unable to pay its debts;

It shall be pertinent to note that if an 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 in the favor of a creditor of the company is returned unsatisfied in whole or in part;  or if it is proved to the satisfaction of the Tribunal that a company is unable to pay its debt, 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 [4].

(b) if the company has, by special resolution, resolved that the company be wound up by the Tribunal [5];

(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 authorized 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.

The Petition Of Winding Up By The Tribunal Can Be Made By The Following:-

According to section 272 clause 1 of the Companies Act, 2013, a petition of winding up of the company can be made by the following :

(a) the company;

– It occurs in cases where a company passes a special resolution to wind up the company.

(c) any contributory or contributories;

– The section 2 clause 26 of the Companies Act, 2013 defines the term contributors which includes holders of any shares which are fully paid-up and who are shareholders of the company at the time of commencement of winding up.  

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

(e) the Registrar;

– According to 272 clauses 4 of the Companies Act, 2013 that the Registrar may with a prior sanction of the central government, file an application petition for winding up of company only based on the following grounds:-

 1.) When a company default in submitting a statutory report is a statutory meeting

2.) When a company has not commenced its meeting within one year from the date of its incorporation

3.) When the financial statements are disclosed by the Registrar or the report by the special auditor or on the inspection made under section 210 or 213 it appears that the financial conditions of the company is unable to pay debts.

4.) When the Central government authorizes the Registrar of the company to wind up.

5.) In case the member of the company is fallen below the statutory requirements

6.) Where it was just and equitable by the Registrar of the Company to wind up.

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

– If any report submitted by the inspector appointed to investigate the affairs of the company that either the business of the company is conducted in an unlawful manner or the person concerned for management of the company are guilty of fraud or any kind of misconduct 

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

Powers of Tribunal

According to section 273, 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;

(d) make an order for the winding-up of the company with or without costs; or

(e) any other order as it thinks fit: Provided that an order under this subsection shall be made within ninety days from the date of presentation of the petition:

 Provided further that before appointing a provisional liquidator under clause (c), the Tribunal shall give notice to the company and afford a reasonable opportunity to it to make its representations, if any, unless, for special reasons to be recorded in writing, the Tribunal thinks fit to dispense with such notice:

Provided also that the Tribunal shall not refuse to make a winding-up order on the ground only that the assets of the company have been mortgaged for an amount equal to or in excess of those assets, or that the company has no assets.

Where a petition is presented on the ground that it is just and equitable that the company should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy.

Voluntary Winding Up

Under voluntary winding up the members of the company under mutual agreement tends to end the life of the company through a special resolution where a notice must be given at least twenty-one days prior in order to commence in the general meeting that the company be will wind up as per section 304 of the Companies Act, 2013.

The purpose of triggering a winding-up could be to avoid bankruptcy events arising due to default in payment of debt other reasons could be that the main agendas of the company have been achieved and its time to cease the operations of the company and accordingly distributes the assets of the company among the members. The business of the company ceases to exist in operation after the commencement of winding up.

The directors of the company make an inquiry to verify whether the company is free from all the liabilities. A penalty shall be charged with an imprisonment of not less than three years which may extend to five years or with fine shall not be less than fifty thousand rupees but can extend to one lakh or both in case the directors makes any declaration which is not on reasonable ground.

The Inclusion of Insolvency And Bankruptcy Code, 2016

On 30th March 2017 the central government has notified that section 59 of the insolvency and bankruptcy code, 2016 will provide a procedure to be followed regarding voluntary winding up of a company [6]. According to this section “A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter.”

Significant Takeaway

The winding-up of the company is a complex process through which all the business operations of the company to cease. There are two modes of winding up i.e., by a tribunal and voluntary. While the tribunal has been conferred the power to wound up a company based on grounds provided under the Companies Act, 2013 the voluntary winding up is a discretionary power of the members of the company based on circumstances they deem necessary to do so. The inclusion of insolvency and bankruptcy code, 2016 which provides for voluntary winding up of the company has removed the complexities of the windingup and thereby streamlined the whole process at the convenience of the members of the company.

Edited by Pushpamrita Roy

Approved & Published – Sakshi Raje 

Reference

1. SENGUPTA B.K : COMPANY LAW ,(2nd ed 1990), p598

2. GOWER: THE PRINCIPLES OF MODERN COMPANY LAW, (4TH ed) p. 719

3. Clause (94-A) inserted by the Insolvency And Bankruptcy Code, 2016 vide Schedule Eleventh of the Code.

4. Section 271 (2) (a) and (b) of Companies Act, 2013

5. Amendment of Insolvency and Bankruptcy Code, 2016 , Section 9

6. Section 59 of the Insolvency and Bankruptcy, 2017

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I am Tosani Lal from Amity Law School, Noida. My interest in the field of law started when I had shifted to the Gulf at a very early age. There I observed how laws of different countries govern the conduct of its people and also have a great impact on them. At law school, when I read the Constitution Of India I was deeply impressed by it and realized that to bring the change in the system you have to be part of the system. I have a keen interest in the Human Rights of women and children and with the help of my knowledge in the legal field I want to contribute to improving the deteriorating situation of society to do my bit to bring a positive change in society.