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Winding Up of Company

Winding Up and Modes of Winding of Companies in India

Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called a ‘liquidator’, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their respective rights. Winding up procedures are laid out in the Companies Act, 1956 (“Act”). Broadly speaking, under the Act, there are two main ways winding up can occur,

(a) by the court/tribunal
(b) voluntary winding up.

Winding Up of the company by the Tribunal

a) Circumstances in which company may be wound up [Section 433]- A company may be wound up by the Tribunal where the petition has been filed with the Tribunal under any of the following circumstances:

• Where the company has, by special resolution, resolved that the company be wound up by the Tribunal.
• Where the company fails to deliver the statutory report to the Registrar.
• Where the company dose not commence its business within one year from the date of its incorporation.
• Where the number of its members is reduced below seven incase of the public company and below two incase of the private company.
• Where the company is unable to pay its debts.
• Where Tribunal is of the opinion that it is just and equitable to wound up the company.
• Where the company is in default of filing its balance sheet or annual return for any five consecutive financial years.
• Where the company has acted against the interest of sovereignty and integrity of India.
• Where the Tribunal is of the opinion to wound up the company under the circumstances specified in section 424G (incase of the SICK industries).

b) Application of winding up [Section 439]- An application for winding up of the company shall be by way of an petition and can be filed 1) by the company or 2) by any creditor or creditors of the company or 3) by any of the contributory or contributories or 4) by the Registrar or 5) by any person authorized by Central Government or 6) by State Government and Central Government.

Upon the receipt of the petition the Tribunal will move on with the process of winding up as per the procedure covered under section 439-481 of the Companies Act.

Voluntary Winding Up (Chapter III of Part VII of the Act)

A company may be wound up voluntarily when:

1) The company in a general meeting passes an ordinary resolution for voluntary winding up (i) where the period fixed by the Articles of Association for the duration of the company has expired, or (ii) the event has occurred on which, under the Articles of Association, the company is to be dissolved; or
2) If the company resolves by special resolution that it shall be wound up voluntarily.
It is important to highlight that under the Act, a minimum 21 clear days notice is required to be given to convene a general meeting. However, with consent of shareholders (as per the relevant provisions of the Act), shorter notice is possible, though practically, for larger public limited companies, obtaining such consent may be difficult, in which case, they need to follow the 21 clear days notice requirement.

A voluntary winding up is deemed to commence at the time when the resolution for voluntary winding up is passed as above. Thereafter, notice of the commencement of winding up has to be made in the Official Gazette (by applying to the Registrar of Companies) within 14 (fourteen) days of the commencement of the winding up. Further, the notice of the commencement of winding up has to be published in some newspaper circulating in the district, where the registered office of the company is situated.

From the commencement of winding up, the company shall cease to carry on its business except as may be required for the beneficial winding up of the company. However, the Corporate state and the corporate powers of the company continue until it is dissolved.

Further, the Act envisages two kinds of voluntary winding up, viz., (a) members’ voluntary winding up and (b) creditors’ voluntary winding up. The rules highlighted above common to both these processes. However, the Act stipulates specific provisions with respect to these two kinds of winding up.

(A) Members’ Voluntary Winding Up:

Members’ voluntary winding up is possible only when the company is solvent and is able to pay its liabilities in full. The following are the important provisions regarding members’ voluntary winding up.

a) Declaration of Solvency [Section 488 of the Act] – Where it is proposed to wind up a company voluntarily, its directors, or in case the company has more than two directors, the majority of the directors, may at a meeting of the board, make a declaration verified by an affidavit, to the effect that they have made a full enquiry into the affairs of the company and that having done so, they have formed the opinion that the company has no debts, or that it will be able to pay its debts in full within such period not exceeding 3 (three) years from the commencement of the winding up as may be specified in the declaration. Such declaration, to be effective, must be made at least 5 weeks before the passing of the ordinary/special resolution in the general meeting commencing the voluntary winding and has to be delivered to the Registrar of Companies (“ROC”) within the said period.

b) Appointment and remuneration of liquidators [Section 490] – The company in a general meeting must: -

(i) Appoint one or more liquidators for the purpose of winding up the affairs and distributing the assets of the company; and
(ii) Fix the remuneration, if any, to be paid to the liquidator or liquidators. Any remuneration so fixed cannot be increased in any circumstance whatever, whether with or without the sanction of the court. No liquidator shall take charge of his office unless his remuneration is so fixed.

c) Board’s power to cease- On the appointment of a liquidator, all the powers of the board of directors and the managing or whole time director or manager shall cease except for purpose of giving a notice of such appointment to the registrar. But their powers may continue if sanctioned by the general body of the shareholders or by the liquidator to the extent of the sanction [Sec. 491].

d) Notice of appointment of liquidator to be given to Registrar [Sec. 493] – The company must give notice to the Registrar regarding the appointment of liquidator within ten days of his appointment.
e) Power of liquidator to accept shares, etc. as consideration of sale of property of the company [Sec. 494] – The liquidator may accept shares, policies, or like interest in consideration of the sale of the company’s undertakings to another company, with an object to distribute the same amount the members of transferor company, provided:
(i) A special resolution is passed by the company to that effect; and
(ii) He purchases the interest of any dissenting member at a price to be determined by agreement or by arbitration.

f) Duty of liquidator to call creditors’ meeting in case of insolvency [Sec. 495] – If the liquidator is at, any time of the opinion that the company will not be able to pay its debts in full within the period stated in the declaration of solvency, or that period has expired without the debts having been paid in full, he must forthwith summon meeting of creditors and must lay before them a statement of the assets and liabilities of the company.

g) Duty of the liquidator to inform the Income-tax Officer – Every liquidator of a company being wound up is to give notice of his appointment as liquidator to the income tax officer having jurisdiction to access the income of the company, within thirty days of such appointment as the liquidator will be held as the principal officer of the company for tax assessment.

h) Duty of Liquidator to call general meeting at the end of each year[Sec. 496]
The Liquidator shall call the general meeting at the end of the every year where the winding up continues for more than one year within three months from the end of each year or such longer period as Central Government may allow and shall present before the meeting an accounts of his acts and dealings and of the conduct of the winding during the preceding year undertaken by him.

i) Final meeting and dissolution [Sec. 497] – Subject to the application of Section 498, as soon as the affairs of the company are fully wound up, the liquidator shall,
(i) Make up an account of the winding up showing how the winding up has been conducted and the property of the company has been disposed of; and
(ii) Call a general meeting of the company for the purpose of laying the account before it, and giving any explanation thereon.[1]
The Liquidator shall send to the Registrar and the Official Liquidator a copy of accounts and shall make a return to each of them within one week after the meeting and the Registrar upon receipt of such return shall register the same and the Official Liquidator upon receiving such return have to submit a report to the Tribunal stating whether the affairs of the company have been conducted in the manner prejudice to the interest of its member or not.

j) Dissolution of the company – The word ‘dissolution’ implies bringing the existence of the company to an end. A dissolved company cannot hold any property or be sued in Court of Law. If any property of the company still remains at the point of dissolution, such property will vest in the government immediately after dissolution. The liquidator must also become functus officio on dissolution.

(B) Creditors’ Voluntary Winding Up:

n

The following are the important provisions regarding creditors’ voluntary winding up.
(a) Meeting of the Creditors [Section 500]- Where it is proposed by the creditors’ of the company to wind up the company voluntary, the meeting of the creditors of the company must be called on the day, or the day next the following day, on which the general meeting of the company at which the resolution for voluntary winding up is to be proposed and the notice of the meeting of the creditors is to be sent to all the creditors along with the notice of the general meeting of the company.[2] The Board of Directors of the company shall present before the creditors full statement of the position of the company’s affair together with the list of creditors of the company and the estimated amount of their claims.
(b) Notice of resolutions to be given to Registrar [Section 501] – Where at the meeting of the creditors any resolution is passed, the notice of such resolution shall be given to the Registrar within the 10 days of passing of such resolution.
(c) Appointment of the Liquidator [Section 501] - The creditors and the company at their respective meetings, may nominate a person to be the liquidator for undertaking the winding up process, however, where at the creditors meeting and the meeting of the company different persons are nominated as the liquidator then in that case the person nominated by the creditors shall be the liquidator of the company.
(d) Appointment of the Inspection committee [Section 503]- The creditors may at the meeting appoint a committee to inspect the whole procedure of winding up of the company.
(e) Remuneration of the Liquidator [Section 504]- The committee of inspection, if any, or the creditors may fix the remuneration of the liquidator however where they fails to fix any remuneration in that case the remuneration of the liquidator is fixed by the Tribunal.
(f) Power of liquidator [Section 505 & 507]– The liquidator of the company shall exercise all the powers as are vested with the Board of Directors of the company further the provisions of Section 494 (powers of liquidator in case of members’ voluntary wing up) shall equally apply in the case of creditors voluntary wing up with the modification that the powers of the liquidator shall not be exercised except with the sanction of either the Tribunal or the committee of inspection, if any appointed.
(g) Duty of Liquidator to call general meeting at the end of each year [Sec. 508] The Liquidator shall call the general meeting of the company and the meeting of the creditors at the end of the each year where the winding up continues for more than one year within three months from the end of each year or such longer period as Central Government may allow and shall present before the meeting an accounts of his acts and dealings and of the conduct of the winding during the preceding year undertaken by him.
(h) Final meeting and dissolution [Sec. 509] – As soon as the affairs of the company are fully wound up, the liquidator shall,

(i) Make up an account of the winding up showing how the winding up has been conducted and the property of the company has been disposed of; and

(ii) Call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before it, and giving any explanation thereof.[3]

The Liquidator shall send to the Registrar and the Official Liquidator a copy of accounts and shall make a return to each of them within one week after the meeting and the Registrar upon receipt of such return shall register the same and the Official Liquidator upon receiving such return have to submit a report to the Tribunal stating whether the affairs of the company have been conducted in the manner prejudice to the interest of its member or not.

i) Dissolution of the company – The word ‘dissolution’ implies bringing the existence of the company to an end. A dissolved company cannot hold any property or be sued in Court of Law. If any property of the company still remains at the point of dissolution, such property will vest in the government immediately after dissolution. The liquidator must also become functus officio on dissolution.

[1] The meeting must be called by advertisement specifying the time, place and object of the meeting, and must be published at least one month before the meeting in the Official Gazette and also in newspapers circulating in the district where the registered office of the company is situated.

[2] The notice of such meeting of the creditors must be advertised in the Official Gazette and at least in two newspapers circulating in the district in which the registered office or the principal office of the company is situated.

Modes of Winding Up

There are three modes of winding up of a company. These are:
(a) Compulsory winding up by the court.
(b) Voluntary winding up, which is itself of two kinds:
i. Members’ voluntary winding up.
ii. Creditors’ voluntary winding up.
(c) Winding up under the supervision of the court.

Winding up by court:

A company may be wound up by an order of the court. This is called compulsory winding up. Section 433 lays down the following grounds for the winding up of a company by the court.

1. Special resolution of the company:
If the company has by a special resolution resolved that it may be wound up by the court. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or company’s interest.
2. Default in holding statutory meeting:
If a company makes a default in delivering the statutory report to the registrar or in holding the statutory meeting, the court may order winding up of the company either on the petition of the register or on the petition of the contributory. The petition for winding up must not be filed before the expiration of 14 days after the last day on which the statutory meeting ought to have been held. However, the court may instead of making a winding up order, direct the statutory report shall be delivered or that meeting shall be held.
3. Failure to commence or suspension of business:
Where a company does not commence its business within a year from its incorporation, or suspends its business for a whole year, the court may order for its winding up. The power of the court is discretionary and will be exercised only where there is a fair indication that the company has no intension to carry on the business. Where the suspension of the business is temporary or can be satisfactorily accounted for, the court will refuse to make an order. A company will not be wound up if it abandons one of its several businesses, unless that business is the main object of the company.
4. Reduction of members below minimum:
Where the number of members is reduced below 7 in the case of public company and below 2 in case of a private company, the court may order the winding up of the company. This provision is for the protection of existing members against unlimited liability.
5. Inability to pay debts:
The court may order for the winding up of a company if it is unable to pay its debts. The basis of an order for winding up under this clause is that the company has ceased to be commercially solvent i.e. it is unable to met its current demands, although the assets when realized may exceed its liabilities. According to section 434 of the act a company shall be deemed to be unable to pay its debts in the following cases:

a. If a creditor to whom the company owes a sum of Rs.500 or more has served on the company a notice for payment and the company has for three weeks neglected to pay or otherwise satisfy him. But where the company bonafide disputes the debt and the court is satisfied with the defense of the company, the court will not order for its winding up.
b. If execution or other process issued on a decree or order of any court in favor of a creditor is returned unsatisfied in whole or in part.
c. If it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court will take into account the contingent and the prospective liabilities of the company. What has to be proved under this clause is not whether the company’s assets exceed it s liabilities, but whether it is unable to meet its current demands. If a company is unable to meet its current liabilities, it is commercially insolvent and liable to be bound up.

6. Just and equitable:
The last ground on which the court can order the winding up of a company is when the court is of the opinion that it is just and equitable that the company should be wound up. This clause gives the court a very wide power to order winding up wherever the court considers it just and equitable to do. The court will consider such grounds to wind up a company for just and equitable reasons as are not covered by the preceding fie clauses.
The following are the instances where the courts have exercised their discretion under this clause:
i) Where there is a deadlock in the management.
ii) Where it is impossible to carry on the business of the company except at a loss.
iii) Where the company has ceased to carry on its authorized business and is engaged in an illegal business.
iv) Where the object for which the company is formed is impossible of further pursuit.
v) Where the minority is being disregarded or oppressed.
vi) Where there is lack of confidence in directors.
vii) Where a company has been conceived and brought forth in fraud.

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