Winding up of Company under Company Law

Winding up of a company

Winding up of a company is the process whereby the company’s life comes to an end and its assets are administered for the benefit of its creditors and members. An administrator, called liquidator is appointed and he takes control of the company assets pays debts and finally distributes any surplus among the members in accordance their respective rights.

In the words of Pennington winding up is the procedure by which the affairs and management of company’s assets are taken from the directors, its properties are managed by a liquidator, and its debts and liabilities are discharged out of the proceeds of realisation and any surplus of assets remaining is returned to its members or shareholders. At the end of the winding up the Company it will have no assets or liabilities, and it will take the formal step of dissolution.[i]

Winding up of a company can be due to a number of reasons such as hardship, bankruptcy etc. The winding up of a company can be initiated intentionally by the shareholders or creditors or by a Tribunal.

The court on hearing the winding up application can either expel it or to make an interim request as it thinks suitable. It may even appoint a liquidator for the company till the application has been passed.[ii]. Winding up order may be given by the court with or without cost. Thus, it a mechanism whereby the assets of the company are utilised for the advantage of its shareholders and creditors. The person who manages the entire assets of the company when it is in winding up position is called as called Liquidator.

With the enactment of the Insolvency and Bankruptcy Code, 2016, it has become difficult to apply provisions simultaneously and to decide precedence. The IBC has also included a lot of amendments to the Act. The Code provides a constructive framework for companies. With the passing of the Insolvency and Bankruptcy Code, there are now two modes of winding up; either under the Companies Act of 2013 or the IBC Code of 2016. Under Section 2(94A) winding up under this Act, i.e. the Companies Act or the Insolvency and Bankruptcy Code, 2016.

Winding up Under Company’s Act, 2013

Prior to the Insolvency and Bankruptcy Code, there were two forms of winding up, first being the voluntary winding up from sections 304 to 323 of Companies Act and the second being winding up by the tribunal. The first has been deleted with the passing of the code and presently, compulsory winding up, i.e. winding up but tribunal is the existing method under the 2013 Act.

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

Winding-up by the Tribunal, may be conducted if any of the circumstances mentioned in section 271 are fulfilled. The Tribunal can order for the winding up of the company on an application by any of the persons who are authorised under section 272.

A company can be wound up by the order of the tribunal;

1. If the company, by special resolution has resolved that the company should be wound up by the Tribunal;                  

2. 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;

3. If an application is made by the Registrar or any other person  who authorised by the Central Government, and the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or

If the company was designed for fraudulent and unlawful purpose or

If the persons in the management of its affairs of the company are guilty of fraud, misfeasance or misconduct and in interest of justice it should be wound up;

1. 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

2. The company would be wound up if Tribunal is of the opinion that it is just and equitable that it should no longer remain in function.

With the passing of Insolvency and Bankruptcy Code, grounds of inability to pay debt and winding up under have been deleted.

Winding Up by Special Resolution (Section 271)

The company special resolution can decide that it would be wound up by the Tribunal. The resolution can be passed for any reason. However, Tribunal must see that the winding up is not opposed to public interest or the interest of the company as a whole. The Tribunal is also to take into account the possibility of the company to have a financial revival, when the company is incurring loss that led the company to pass special resolution for winding up. This clause is based on the premise that, the shareholders being corporate entities have the requisite skill to judge and decide as to whether or not the company should go out of existence. It is the shareholders who had formed themselves into the company and, therefore, it is for them to dissolve the company. The directors are not entitled to file a winding up petition without the authority of the general meeting. The directors may file this application, subject to the ratification of proposal[iii].

The company has to call general body meeting and pass a special resolution including therein specifically their resolve for winding up by Tribunal and setting out grounds in the explanatory statement attached thereon explaining why winding up of the company is needed. It may be noted that the court has the discretion and is not under any obligation to order winding up[iv].

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(271):

The grounds like 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 are due to the geo-political scene and its contours, the remaining grounds of public order, decency and morality, do not appear to belong to the same strain. The other grounds remain a point of contention as the corporations if engage in public indecency there are regulatory agencies which should be governing them.

Company Affairs conducted in fraudulent and unlawful manner

Any person authorized by the Central Government or the Registrar can apply to the Tribunal for winding up proceedings. The Tribunal may order winding up on grounds such as

  • The affairs and management of the company is being conducted in a fraudulent manner;
  • The company was formed for unlawful or fraudulent purpose; or
  • The persons concerned in the formation of the company or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith.

Company has made a default in filing with the Registrar its financial statements:

Section 271(d) provides a ground of winding up of company in cases where it defaults in filing of the annual financial statements or annual returns. It is an indispensable attribute to ensure that non-accountability and indiscipline in running the management of the company is not rewarded and Government companies are no exceptions.

If default is made in respect of five consecutive financial years, the clause of winding up can be invoked. There can be default in either financial statements or annual return. Thus, if annual return has been filed for five consecutive financial years but financial statements not filed regularly, this is applicable. The converse is also applicable.  The crux and the primal test is that there should have been a default in either of two cases for consecutive five financial years. Further emphasis has to be on ‘immediately preceding five consecutive’ years.

Just and Equitable

The Tribunal may also order for the winding up of a company if it is of the view that company should be wound up for justice and equity. This is a completely separate and independent ground for a winding up order. For this to be applicable, it is not pertinent that the circumstances should be corresponding to those which justify an order on one of the six grounds. In exercising its power on this ground, the Tribunal shall give due weightage to the interest of the company, its employees, creditors and shareholders and the interest of the general public. The relief is like a last resort when the other remedies are not efficacious enough to protect the general interests of the company.[v]

The judiciary over the years have wound up many companies and organisations on this ground as it is in general public interest and equity.[vi]:

  • Impasse: When there is a hold-up in the administration of a company, in the opinion of court it is just and equitable to wind up the company.[vii]
  • Loss of Substratum: When the company has neglected to emerge the main objects of the company. The imperative outline here is the instance of German Date Coffee Co[viii], where a company was framed to manufacture coffee from dates under a patent which was to be allowed by the Government of Germany and allowed different licenses. The German patent was not allowed and the company set different and distinct licenses. In any case, on the appeal to of an investor, it was held that the substratum of the company had fizzled, and it was difficult to complete the articles for which it was framed; and, thus, it was just and equitable that the company to be wound up.
  • Losses: When a company can’t convey forward its business with the exception of bearing the weight of misfortunes, at that point it is just and equitable for the company to be twisted up. The Bombay High Court saw in the instance of Shah Steamship Navigation Co[ix], that the Court won’t be justified in making a winding up arrange just on the ground that the company has made misfortunes; and is likely to make assist misfortunes.
  • Oppression of Minority: It is just and equitable to wind up a company where the principle shareholders have received a forceful or severe or squeezing strategy towards the minority.
  • Fraudulent Purpose: If the company has been imagined and brought forward in misrepresentation or for unlawful purposes, at that point it is just and equitable to wind up the company. In Universal Mutual Aid and Poor Houses Assn v. A. Thoppa Naidu[x] the Madras High Court watched, where the main protest of a company is the direct of a lottery, the negligible fact that a portion of its articles were charitable won’t keep the company from being wound up for unlawful purposes.
  • Open interest is likewise another vital ground, based on which the court can arrange the winding up of the company.

Petitioners for Winding up of Company

According to Section 272 by the Companies Act, 2013 the following individuals have the authority to file for a compulsory winding up procedure under Companies Act.

Company as Petitioner (272(a)):

The Company may present a petition for Compulsory Winding Up if a special resolution has been passed to that effect[xi].

Contributory or contributories as Petitioners (272(b)):

A contributory shall be entitled to present the petition only if the shares were originally allotted to him; or he has held his shares for at least 6 months during the 18 months immediately preceding the commencement of winding up; or the shares have been devolved on him by reason of the death of a member. 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 the company may have no assets at all; or the company may have no surplus assets left for distribution among the shareholders after the payment of its liabilities.

Registrar (272(d)):

The Registrar is allowed to present a petition for winding up only on the following grounds;

1. Company acting against the security of the country etc.

2. Where the affairs of the company have been conducted fraudulently

3. Non-filing of financial statements or annual returns by the company

The Registrar shall obtain the previous approval of the Central Government before making a petition for winding up. Further, the Central Government shall not grant the approval to the Registrar unless the company has been given a reasonable opportunity of making representations.

The Central Government or a State Government (272 (e) and (f)):

Any person authorised by the central government or, if the petition is made on the ground that the company has acted against the interests of the sovereignty and integrity of India; or the security of the State; or friendly relations with foreign States; or public order; or decency; or morality[xii].

A copy of every petition made to the Tribunal for winding up of a company shall also be filed with the Registrar. Within 60 days of receipt of petition, the Registrar shall submit his views to the Tribunal. Every petition shall be filed according to Form No. NCLT. 1. Other attachments are to be accompanied in Form No. NCLT. 2. The verification of the same has to be done according to an affidavit under Form No. NCLT. 6.

Procedure for Winding up of Company

The petition to the Tribunal for the winding up of a company shall be presented by the company, or any creditor or creditors, any person authorized by the Central Government in that behalf, or by the Central Govt. or state govt.[xiii]. The winding up of a company by tribunal is deemed to begin at the time of the filing of petition for winding up[xiv]. On receipt of a petition for winding up under section 272, the Tribunal may pass any of the following orders, namely:

1. Dismiss it, with or without costs;

2. Make any interim order;

3. Appoint a provisional liquidator of the company during the pendency of winding up petition;

4. 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.[xv] The Tribunal shall direct the company the opposite party before appointing a provisional liquidator and give them opportunity to make their representations and file any objections if any. Such shall be filed according to Form No. NCLT. 5.

Since the powers of the tribunal are discretionary, if it is satisfies that a prima facie case exists for winding up, the tribunal may direct the company which is bound to be wound up, to file its objections along with a statement of affairs within 30 days of order under section 274 of The Act. The tribunal shall also appoint a provisional liquidator or a company liquidator at the time of passing an order for winding up of the company. Such a liquidator on appointment under section 275 of the Act, such shall file a declaration within 7 days from the date of appointment if he has any conflicting interests in respect of his appointment.

 If an order for winding up has been passed by the tribunal under section 273 (1) (d) , then the directors and such other officers of the company are mandated by law to submit the completed and audited books of accounts of the company within 30 days of such order being passed by the tribunal to the provisional liquidator[xvi]. If the same is contravened, the director shall be personally liable for fine and imprisonment under the Act.

Once the tribunal appoints a provisional liquidator or passes an order for winding up, the tribunal within 7 days from the date of passing such order, shall intimate the same to the liquidator and the registrar. The registrar has the duty to endorse and notify about the order in the official gazette[xvii]. If the company is a listed company, then the registrar has to notify it in the stock exchange where the securities of the company are listed.  The liquidator has to submit a report to the tribunal within 60 days of passing of order of winding up. The report must consist of particulars such as the nature and details of the assets of the company, valuation of the assets, amount of capital issues etc. The liquidator may also have to make a report on the feasibility of the commercial aspects of the company and make any further reports as he deems fit[xviii].

While passing the order of winding up, the tribunal shall pass an order to set up an advisory committee to advice the liquidator and report to the tribunal as directed. It shall consist of 12 members of which are shareholders, contributories and creditors of the company. The company liquidator shall convene a meeting of creditors and contributories of the company within 30 days from the date of order of winding up so that the tribunal can decide the composition of the committee. This committee shall be headed by the Company Liquidator.

Within 3 weeks of such order of winding up, the liquidator shall also make an application to the tribunal to constitute a Winding up committee to assist and monitor the process of liquidation. The liquidator shall be the convener. He has the duty to place monthly reports before the tribunal and prepare a draft final report for approval of the committee. The final report will be submitted by the Company liquidator to the tribunal to pass dissolution order for the company.

The tribunal after careful scrutiny of the report of the company liquidator, shall fix a time within which the entire proceedings shall be completed and the company is to dissolved[xix]. It may also order the sale of the company. If the sale has to be affected a sale committee can be appointed to assist the company liquidator[xx].

The company liquidator on the order of winding up of company shall take into his custody and control all the property, actionable claims to which the company is entitled. The property of the company shall be deemed to be in the custody of the tribunal from the date of passing of winding up order.[xxi] Along with this, he has to submit periodic reports to the tribunal to update and keep the tribunal in loop of the progress.[xxii]

The liquidator is mandated by law under Section 294 to present the tribunal with account of receipts and payments of the company. These will then go through audit and one copy of the audit has to be given to the tribunal and to the registrar by the company liquidator. The summary of the audit shall also be given to every creditor and every contributory through post.

The next stage called as set off is conducted whereby the contributories are called upon to pay debt .The tribunal orders the contributories to pay to the extent of their liabilities[xxiii]. Further it may even issue summons to persons who are suspected of having company property and examine such person summoned, reduce his answers to writing and require him to sign them[xxiv]. 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.

Within 60 days of his appointment, the official liquidator shall dispose all assets of the company.  He shall serve a notice to the debtors to submit any outstanding amount. The amount that he receives has to be deposited in RBI and the company account money in no circumstance be deposited in his own private accounts. He shall also call the creditors to prove their claims within 30 days of his appointment. Upon the claims, he shall prepare a list and each creditor shall be communicated as to whether their claims have been accepted or rejected. If any creditor is aggrieved he can appeal to the central government. The official liquidator shall pay to those creditors whose claims have been enlisted and accepted.

After all the formalities, once the affairs of the company have been completely wound up, the company liquidator shall will submit a report to the central government and tribunal and make an application to the tribunal for dissolution of such company[xxv].The tribunal shall make an order that the company be dissolved from the date of the order and the company shall be dissolved accordingly. The registrar will strike off the company from the register of companies and publish a notification that the same has been removed. A copy of the order will be sent to the registrar by the company liquidator within 30 days and it is recorded in the register.

Every invoice, order or business letter when the company is being wound up should contain a statement that the company is being wound up[xxvi].  When the affairs of the company have been completely wound up, and it is about to be dissolved, its books and papers have to be completely disposed in the manner as the tribunal directs[xxvii].

If any dissolution has been conducted with a malafide purpose, the tribunal has the power to declare such dissolution null and void. However, this must be passed within two years of the original dissolution.

Conclusion

The process of winding-up of a company is not very simple, it includes within it many complexities and technicalities. Earlier there was just the Companies Act, 2013, which governed this area, however with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide precedence. However, the process of compulsory winding up under the Company Act, 2013 a favourable framework for companies for winding up.

Frequently Asked Questions

What do you understand by winding up of a company?

Winding up of a company is the process whereby the company’s life comes to an end and its assets are administered for the benefit of its creditors and members. Winding up of a company might be required because of various reasons including conclusion of business, misfortune, bankruptcy, passing endlessly of promoters, and so forth and this process provides an apt way for the company and its various entities to end business usually in a profitable space. 

What is the distinction between dissolution and winding up of a company?

Though both the terms are often used simultaneously, however, under dissolution of company, the very existence of company comes to an end. It no longer is present in the registry of companies and it has no longer any legal personality of its own. However, in the case of winding up, the company has its legal personality and it can carry on functions like other companies just it is in the process of terminating its life. 

Who can be the petitioners for winding up of a company?

A winding up petition can be filed by a company through its special resolution, a creditor, a contributory, Registrar, on prior approval of the Central Government, any person authorised by the Central Government, in case of investigation into the business of the company is being conducted due to allegations of fraud etc. 

Who is a Company Liquidator?

A Company liquidator is any person appointed by the tribunal who administers the assets of the company while it is going through the winding up process. During winding up, he has the primal responsibility of asset management and liquidation of the same and distribution of surplus to the shareholders.

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 

Reference

[i] Pennington’s Company Law, 5th Edition, Page 839

[ii] Barsha Dixit, Winding Up of Company, Vinod and Kothari Company, ISBN:6734-00234

[iii] Galway & Salt Hill Tramways Co., In re [1918] 1 IR 62/521 LG 93.

[iv] New Kerala Chits & Traders (P.) Ltd. v. Official Liquidator [1981] 51 Comp. Cas. 601 (Ker.).

[v] Gadadhar Dixit v. Utkal Flour Mills (P.) Ltd. [1989] 66 Comp. Cas. 188 (Ori.); Kiritbhai R. Patel v. Lavina Construction & Finance Ltd. [1999] 20 SCL 158

[vi] (McPherson 1964)

[vii]Ibid 4

[viii] [(1882) 20 Ch D 169]

[ix] (1901) 10 Bom LR 107]

[x] AIR 1933 Mad 16]

[xi] Re Orissa Trunks & Enamel Works Ltd. (1973) 43 Comp. Cas. 503

[xii] Companies Act, 2013;An Analysis of Winding up under the IBC, 2016

[xiii]S.272, Companies Act, 2013

[xiv] S357

[xv] S 273Companies Act, 2013

[xvi] 274

[xvii] 277

[xviii] 281

[xix]S 282

[xx]under section 282of

[xxi] 283

[xxii]section 288of

[xxiii] 296

[xxiv]Section 299

[xxv] 302

[xxvi](section 344)

[xxvii] 347